* Italian yields down 5-9 bps across the curve
* Econ Min pushing to keep deficit below 2 pct - sources
* Fitch report also credited for price reprieve
* Econ min moves to reassure markets
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites story to incorporate comments from Italian ministers)
By Virginia Furness and Abhinav Ramnarayan
LONDON, Sept 3 (Reuters) - Italian bond yields came off three-month highs on Monday after key figures from the country’s anti-establishment government seemed to play down the chances the country would outline a 2019 budget in breach of European Union spending rules.
It was a volatile day for Italian bonds but borrowing costs eventually ended broadly lower after sources told Reuters Italian Economy Minister Giovanni Tria was pushing the parties in the governing coalition to keep next year’s budget deficit below 2 percent of output.
Earlier in the day, Deputy Prime Minister Matteo Salvini said Italy’s 2019 deficit will come close to 3 percent of its gross domestic product without breaching the limit set by the European Union.
Those stories, along with Fitch leaving the country’s credit rating unchanged on Friday, helped knock Italian yields off the multi-month highs hit last week, analysts said.
“The Reuters sources story and the Salvini news helped pull yields lower, but trading is volatile with the U.S. out for Labor Day and I suspect it’s going to be the way the market trades until we get definitive news,” said Mizuho strategist Peter Chatwell.
“What it means is the market is right to have relatively wide (Italy/Germany bond yield) spreads because you need to be compensated for this volatility while these budget negotiations are ongoing.”
Italy’s government bonds outperformed their peers, with the benchmark 10-year yield down five basis points at the close of the session at 3.185 percent, having hit a three-month high of 3.25 percent on Friday.
Short-dated Italian debt was even more in demand, with two-year yields shedding nine basis points to end the day at 1.40 percent.
Fitch retained its BBB credit rating for Italy on Friday, in a much-anticipated ratings review. But the agency changed the outlook for Italian debt, the world’s third-largest pile of state borrowing, to “negative” from “stable”, citing concerns about the populist government’s “new and untested nature” and its promises to hike spending.
“Italy is benefitting from only the downgrade of the outlook, which was already priced in, though some investors may have expected a one notch downgrade,” said Daniel Lenz, rates strategist at DZ Bank.
Analysts say the bid for Italian bonds could be short-lived, however, with conflicting statements from senior officials over Italy’s commitment to EU budget restrictions keeping investors on their toes.
On Sunday Deputy Prime Minister Luigi Di Maio had promised to follow through on his party’s main campaign pledge - a universal income for the poor - which could put further pressure on the budget deficit.
In addition, Italian manufacturing data disappointed, slowing sharply in August to 50.1, very near the 50 mark that separates growth from contraction, its sixth fall in seven months. Spreads did not move in response however.
Elsewhere euro zone yields remained close to recent lows with trade wars and EM currency weakness prompting risk aversion. On Saturday, U.S. President Donald Trump said there was no need to keep Canada in the North American Free Trade Agreement (NAFTA).
German government bond yields remained close to their lowest level in a week with its 10-year government bond, the benchmark for the region, at 0.34 percent having reached 0.42 percent last week.. (Reporting by Virginia Furness and Abhinav Ramnarayan Editing by Gareth Jones, Andrew Heavens and Kirsten Donovan)