* Italy bond yields fall amid continued budget wrangling
* Supportive bid for perhiphery helps Spanish auction
* Spain sells 4.5 bln euros of bonds, France 7.5 bln (Updates pricing, includes results of Spanish, French auctions)
By Virginia Furness
LONDON, Sept 20 (Reuters) - Italian government bond yields fell on Thursday as improved risk sentiment in global markets allowed the market to recover some ground from the previous day’s sharp sell-off.
Italy’s government bond yields fell as much as five basis points across the curve, having jumped by up to 12 basis points in late trade on Wednesday, after wrangles over the 2019 budget.
Italy should aim at a 2019 deficit of more than two percent of output to spur growth, the cabinet undersecretary said on Thursday.
Italy’s 10-year fell on Thursday morning five basis points to 2.80 percent, before rising to 2.82 percent with markets continuing to digest headlines on the 2019 budget.
The move lower reflects a broader appetite for risk, which also helped to push Spanish and Greek yields down by as much as six basis points, and fuelled demand for two large bond auctions.,.
Spain sold 4.5 billion euros of new bonds, the middle of its projected size range, but with a decent bid-to-cover ratio . France also sold almost 7.5 billion euros of bonds.
Rabobank’s head of rates strategy Richard McGuire said the increased demand for debt in the euro zone’s periphery matched a broader market backdrop that saw European and Asian stocks move higher despite an escalation of the trade war between China and the United States.
“Investors are taking a sanguine view on risk,” he said. “There is a higher hurdle to buying BTPs than to selling them.”
Italy’s Deputy Prime Minister Luigi Di Maio reiterated on Thursday that the government’s priority was to make life better for Italians, not to reassure markets. The government is considering increasing the budget deficit to spur growth, he said.
Elsewhere, Germany’s 10-year government bond passed the key 0.5 percent mark on Wednesday to reach a three-month high but receded on Thursday to 0.48 percent.
“Yields yesterday tried to go above 50 bps, but it seems the bears are not yet ready to take this level. That is why we see, for technical reasons, the move to the downside,” said DZ Bank rates strategist Daniel Lenz.
Five-year U.S. Treasury yields hit decade highs on Wednesday as investors continued to price in more interest rate increases by the Federal Reserve this year and next. Ten-year Treasury yields rose to 3.09 pct, the highest level in four months.
Expectations of U.S. growth pushed the spread of 10-year U.S. government bonds over Germany to 260 basis points on Wednesday, its highest since the end of May. The so-called transatlantic spread stood at 259 bps on Thursday.
Reporting by Virginia Furness Editing by David Goodman and Gareth Jones