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UPDATE 2-Italian 10-year government bond yield eases off record lows

(Adds U.S. job data, U.S. presidential race, update prices)

LONDON, Nov 6 (Reuters) - Italian 10-year government bond yield fell to a record low on Friday morning but gradually ticked higher by afternoon along with core euro zone government bonds and U.S. treasuries after stronger than expected jobs data in the U.S.

Italian five-year yields also left negative territory in the afternoon, after falling below zero percent for the first time on Thursday.

While the U.S. economy created the fewest jobs in five months in October, nonfarm payrolls increased by 638,000 jobs last month, a better outcome then the 600,000 figure forecast by economists polled by Reuters.

Benchmark 10-year German government bond yields rose 3 basis points to -0.613%.

Yields continued to rise through the afternoon as Democratic presidential candidate Joe Biden took the lead over President Donald Trump in the battleground states of Pennsylvania and Georgia, putting him on the verge of winning the White House.

The Italian 10-year BTP yield fell to a record low of 0.603% around midday but gradually ticked up back to 0.632% in late afternoon trading.

Lyn Graham-Taylor, rates strategist at Rabobank, said the overall risk-on mood supported Italian yields, but added that the Bank of Italy’s buyback of five-year government bonds could also have been the reason for Italian yields falling by more than their peers.

Italy has bought back five bonds with maturities ranging from 2021 to 2023 for a total of 4 billion euros ($4.75 billion), the Treasury said on Friday.

Five-year Italian government bond yields were back into positive territory after having fallen to -0.008% in the morning.

Yields were unfazed by a -0.8% fall in Italian retail sales in September from the month before.

Italy will continue issuing bonds dedicated to retail investors next year and beyond, the Treasury’s head of debt Davide Iacovoni said on Friday.

“The new political landscape may well prove supportive for risk assets,” said ING analysts in a note to clients.

“As the U.S. election vote proceeded at a snail’s pace over the past two days, we observed a shift in the dominating narrative in financial markets. Risk assets have used that time to come to terms with a Biden ‘lame duck’ presidency, and some have even hailed it as the sweet spot,” ING analysts said.

With Biden leading in results but seen now unlikely to win the Senate, there was a large unwind of bets on a Democratic sweep of both Houses.

As result, investors weighed prospects for big stimulus measures while cheering fading expectations of higher taxes and new regulations.

Reporting by Olga Cotaga; Editing by Kevin Liffey and Louise Heavens