* Italy may have til January to address debt
* Italian bond yield drop 9bps at one point
* German business sentiment lowest since 2014 - Ifo
* Broader EZ bond yields sharply lower
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds quote, updates prices)
By Dhara Ranasinghe
LONDON, June 24 (Reuters) - Italy’s government borrowing costs came close to one-year lows on Monday on news that the European Commission will this week hold off on disciplinary action over Rome’s fiscal targets, lifting hopes that a compromise with Brussels will be found.
Bond yields across the bloc fell as news that German business morale dropped in June to its lowest level since November 2014 reinforced ECB rate-cut expectations.
The European Commission could give Italy until January to make fiscal policy changes under an EU debt procedure, minutes of an EU meeting show, setting a relatively long deadline to help avert fines and any backlash from Rome’s eurosceptics.
Italy’s 10-year bond yield dropped as much as 9 basis points to 2.076% at one stage, nearing more than one-year lows of 2.01% hit last week.
Though the move reversed as the session wore on, and Italian 10-year yields closed only marginally lower at 2.15%, analysts still said the sentiment around the country was improving.
“Italy has had a great run recently so it’s maybe not surprising that some people took the opportunity to shed some of the debt,” said Rabobank rates strategist Richard McGuire.
“That said, I do think it’s rash to sell Italy at the moment, because the hunt for yield is going to become an irrepressible force against this central bank backdrop.”
Political uncertainty still underpins this market, with Deputy Prime Minister Matteo Salvini last week threatening to resign unless he was able to push through at least 10 billion euros ($11 billion) of tax cuts.
“The fact that Salvini is willing to push ahead with tax cuts and there is turbulence in the coalition is not good news for Italy,” said DZ Bank rates strategist Daniel Lenz.
The Commission wants Italy to reduce its debt this year and next and has opposed the wide tax cut plans of the ruling coalition if they are not offset by new revenues or spending reductions - options that Rome has dismissed.
Analysts said there were other reasons for the recent solid performance of Italian bonds.
For starters they offer some of the highest yields among major government bond markets. Expectations are high for ECB monetary easing soon following a hint by ECB chief Mario Draghi last week, overshadowing Italy’s domestic risks for now.
Hopes for a budget compromise between Rome and Brussels have also been boosted by a perception that an increase in fiscal spending across Europe to support economic growth in the face of a global trade war is likely.
The cost of insuring Italian bonds against the risk of a default has fallen sharply this year, while five-year bond yields are down almost 60 bps.
Waning hopes for progress in China-U.S. trade talks at this week’s G20 meeting and fears of a confrontation with Iran also bolstered demand for safe-haven debts.
Germany’s Bund yield fell 3 bps to minus 0.31%, nearing last week’s record lows at around minus 0.33%. Notably, Irish 10-year yields hit a new record low of 0.192%, caught up in a wider euro zone bond rally.
Most other 10-year euro zone bond yields closed the day down 2-6 bps .
Reporting by Dhara Ranasinghe; editing by John Stonestreet and Ed Osmond