December 28, 2018 / 9:16 AM / 5 months ago

Italian bond yields rise ahead of final auction of the year

* Italy to sell up to 5 bln euros of 5, 10-year debt

* Yields rise about 2 bps ahead of the sale

* German inflation due at 1300 GMT

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, Dec 28 (Reuters) - Italian yields rose on Friday as investors made space for the last auction of the year, in which the country’s Treasury will look to end one of the largest borrowing programmes in the world on a positive note.

A strong auction of zero-coupon bonds on Thursday led to a mini-rally in Italian government debt as investors saw this is a good omen for today’s sale of up to 5 billion euros of bonds.

The hope is that this auction will decisively show that Italy has turned a corner after months of volatile trading on the back of fractious talks between Rome and Brussels over the country’s spending plans.

“Liquidity was low yesterday, but the CTZ auction certainly seemed to be taken as a positive sign,” said Mizuho strategist Antoine Bouvet.

“The auction will come at a fairly expensive level given how much Italy has rallied in recent weeks, but the five-year still looks attractive,” he added.

Italy’s 10-year government bond yield rose 2 basis points to 2.77 percent, still close to a three-month low of 2.723 percent hit last week, while the spread over Germany was at 253 bps, also near recent lows.

Five-year yields were 3 basis points higher at 1.85 percent. The Treasury is due to sell five-year and 10-year bonds in the auction.

Political turmoil, turgid growth prospects and worries over the future of the euro have made this one of the most difficult years for the Italian Treasury to fulfil its big borrowing programme.

But after weeks of wrangling, an agreement between Italy and the EU on a budget plan for 2019 has led to a sharp rally in Italian bonds; Italian 10-year yields have dropped 45 bps in December so far, the biggest monthly fall since July 2015.

Elsewhere, German 10-year yields, the benchmark for the bloc, were up a basis point to around 2.5 percent ahead of the release of inflation data from Europe’s biggest economy.

Inflation data for the country as a whole is due at 1300 GMT. Data for Saxony already released showed annual inflation at 1.9 percent in the month of December while other states are due to release consumer price data through the day.

A Reuters poll shows expectations are for a reading of 1.9 percent inflation for Germany as a whole.

Spanish inflation, meanwhile, missed expectations by a big margin, coming in at 1.2 percent for the month of December compared to forecasts of 1.6 percent.

Spanish 10-year government bond yields edged higher nevertheless, and were trading at 1.40 percent at 0850 GMT.

“I was surprised at the lack of reaction (to the Spanish inflation), I do think it’s a cause for concern,” said Bouvet of Mizuho.

“But maybe we have to wait and see how it correlates with other big countries, starting with Germany today.” (Reporting by Abhinav Ramnarayan; Editing by Catherine Evans)

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