September 19, 2018 / 7:23 AM / a month ago

UPDATE 3-German 10-yr bond yield hits three-month high at 0.5 pct

* Budget concerns prompt 12 bps rise in Italy’s five year yield

* German sells 2.426 bln euros of 10-year bonds

* UK inflation data add to selling pressure

* Italy coalition urges economy minister to be flexible on deficit (Updates pricing, adds detail on Italian bond price action)

By Dhara Ranasinghe

LONDON, Sept 19 (Reuters) - Germany’s 10-year bond yield briefly rose to three-month highs on Wednesday, hitting the key 0.5 percent level against a backdrop of new supply, growing risk appetite globally and stronger-than-expected British inflation data.

A selloff in Italian bonds, however, tempered the rise in German yields. Italy’s populist ruling coalition again called on Economy Minister Giovanni Tria to allow greater deficit spending in next year’s budget.

Germany sold around 2.43 billion euros of 10-year Bunds in what analysts say is one of the heaviest weeks for debt supply in months for the euro zone.

In addition, data showed British inflation jumped unexpectedly to a six-month high in August — providing a fresh impetus for investors to sell bonds globally.

British 10-year gilt yields rose to their highest since February and U.S. Treasury yields hit four-month highs at 3.092 percent.

Germany’s 10-year Bund yield briefly touched 0.502 percent , before pulling back to around 0.49 percent to trade flat on the day. It is up around four bps this week and 16 bps this month.

“I think 50 basis points has had something of a gravitational pull for the 10-year German benchmark,” said Peter Chatwell, head of rates at Mizuho in London. “We are going through a repricing of rate expectations globally.”

A rally in world stocks and expectations for another rise in U.S. interest rates next week have both weighed on the world’s biggest bond markets.

Italy’s bond yields continued to rise, giving up some of their recent hefty falls, as investors digested headlines from Rome.

Italian Deputy Prime Minister and 5-Star Movement leader Luigi Di Maio said on Wednesday he had “full confidence” in Economy Minister Giovanni Tria after local media reports about Tria’s possible resignation, adding that the objective was not to reassure markets.

Analysts said the market extended losses in late trading after an Instagram post by Italian Prime Minister Giuseppe Conte reiterated his insistence on universal basic income. The ruling parties are seeking to pack at least portions of their main campaign promises into next year’s budget, including a basic income for the poor.

“The prime minister posted on Instagram that the citizens income, the basic income would be part of the budget, which prompted a response in the market,” said Martin van Vliet, senior rates strategist at ING.

Foreign investors bought a net 8.7 billion euros ($10 billion) in Italian government bonds in July, central bank data showed, after a sharp sell-off the previous two months. .

Italy’s 10-year bond yield was last up eight bps on the day at 2.87 percent.

Short end Italian bonds yields were up to 12 bps higher with the five year rising the most in over a month to 1.86 percent . The gap with German 10-year bond yields was 234 bps compared with around 227 bps late Tuesday.

Reporting by Dhara Ranasinghe, additional reporting by Virginia Furness; editing by Larry King, William Maclean

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