* 10-year German bund, 10-year UST down over 4 bps
* Italy/Germany bond hovers close to 300 bps
* Bank of Italy says Italy/Germany spread must be reduced
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts to lead with German bund fall, adds quote)
By Dhara Ranasinghe and Virginia Furness
LONDON, Nov 9 (Reuters) - German 10-year bond yields headed to their biggest one-day fall since late September on Friday, leading a drop in most euro area debt yields as weak Chinese economic data and concerns about slowing U.S. growth fuelled a bid for safe-haven assets.
After a volatile session, Italian bond yields pulled back from highs as investors digested a slew of headlines and the Rome government held firm on its 2019 budget proposal amid tensions with the European Union.
Germany’s 10-year government bond fell 4.8 basis points in late trade to a session low of 0.406 percent, putting it on track for its biggest one-day drop since Sept. 28.
The fall was shadowed by 10-year Treasuries which were also on track for their biggest one-day fall in two weeks, down 4.3 bps to 3.186 percent.
“Sentiment in macro markets has really soured,” said Peter Chatwell, rates strategist at Mizuho. “The fall in oil prices, expectations that the U.S. economy will continue in the purple patch because the Democrats have taken the House, have all shaken risky markets, meaning there is more demand for bonds.”
High-grade euro zone sovereign bonds were all up to four basis points lowers by 1600 GMT. France’s 10-year government bond yield was bound for its largest one-day fall in 3 1/2 weeks, down 3.5 bps on the day to 0.787 percent.
Italian bond yields, pushed higher by concerns over Italy’s standoff with the EU over its 2019 budget, came off the day’s highs as trading wound down.
Ten-year Italian bond yields pulled back to 3.40 percent from 3.46 percent, their highest level in over a week, though the closely watched gap over safer German Bund yields held close to the key 300 basis points mark at 298 basis points..
Italy has until Tuesday to submit a new draft budget to Brussels, revising the size of its structural deficit, so that it will fall by 0.6 percent of GDP as required by EU rules, rather than rise by 0.8 percent as planned now.
Italy’s original proposal was rejected by the EU.
Economy Minister Giovanni Tria said on Friday a sharp reduction in the government’s budget deficit, as demanded by the European Commission, would be suicide for Italy’s economy.
Eurogroup President Mario Centeno told reporters that the Eurogroup of euro zone finance ministers hoped Tria would revise the budget.
“Right now it seems pretty clear that the Italians are not going to change the 2019 budget deficit forecast,” said Mohammed Kazmi, portfolio manager at UBP.
Investors in Italian government bond yields not only have to grapple with tensions between Italy and the EU, but also government infighting over the budget.
Now the Bank of Italy has weighed in on the debate, saying it hopes the government can reach a deal with the EU, warning that rising borrowing costs risk cancelling out the expansionary impact of the budget, and noting that the government’s GDP targets look ambitious.
Reporting by Dhara Ranasinghe; Editing by Hugh Lawson/Mark Heinrich