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Italy's 5-year bond yield turns negative as election uncertainty supports European bonds

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

AMSTERDAM, Nov 5 (Reuters) - Italy’s five-year bond yield turned negative for the first time on Thursday as uncertainty from the U.S. election supported government bonds in Europe.

Democrat Joe Biden on Wednesday predicted victory over President Donald Trump after winning two critical U.S. states, while the Republican incumbent alleged fraud, filed lawsuits and demanded recounts in a race yet to be decided.

But Democrats are falling short of expectations in the Congressional elections, with the Senate looking increasingly likely to stay in Republican hands, which prompted investors to unwind bets on a big new stimulus package on Wednesday, supporting safe-haven bonds.

Moves in euro zone government bonds continued to be less pronounced than in the United States on Thursday. Germany’s 10-year yield was down about 1 basis point at -0.65%, while 10-year Treasury yields were down 5 basis points on the day. .

The outperformance of U.S. Treasuries pushed the gap between 10-year U.S. and German yields to tighten further on Thursday, pushing it to its lowest in over a week at around 138 basis points.

But support for the region’s bonds continued to benefit riskier Southern European bonds, with Italy’s five-year yield turning negative for the first time ever. Its 10-year yield also fell to a record low at 0.627%.

Bond yields across the Italian curve were last down 3-4 basis points on the day.

Investors continue to stress that, beyond risk sentiment-driven shifts, they did not expect a major impact on European bonds from the election.

“European bond yields don’t seem to be moving very much compared to U.S. bond markets, they’re sort of de-linked which is interesting,” said John Vail, Chief Global Strategist at Nikko Asset Management in Tokyo.

“It could just be that the ECB has such a massive control over them that they are not as sensitive. They’ve been gradually losing sensitivity, I’d say, over the last few months, especially since the ECB got really busy again.”

Support from the European Central Bank, which committed to provide additional stimulus in December last week, has pushed Southern European bond yields to record lows despite a surge in coronavirus cases.

In the primary market, France will raise up to 11 billion euros from the re-opening of 10 and 35-year bonds, while Spain will re-open a 20-year bond and a three-year inflation-linked bond to raise up to 2.75 billion euros.

Reporting by Yoruk Bahceli; additional reporting by Elizabeth Howcroft in London

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