EURO GOVT-Equity sell-off hurts periphery before Italian sale
* Lower-rated debt falls along with global equities
* Italian debt also under selling pressure before auction
* Bunds rise, appetite for safety seen resuming
LONDON, June 13 (Reuters) - Yields on lower-rated euro zone bonds rose on Thursday as riskier assets came under selling pressure and investors braced for a sale of Italian debt against a challenging backdrop.
Japanese stocks fell over 6 percent as the prospect of reduced stimulus from central banks roiled markets and European shares opened lower, setting the tone for the day's trading.
Financial markets have been unnerved by fears that the U.S. Federal Reserve could soon start scaling back its bond purchases. Investors will look at U.S. retail sales and weekly jobless claims later this session to gauge the possible timing.
Italy is expected to pay more to raise funds for a sale of three-year and 15-year debt as sentiment towards riskier assets has soured.
"It is partly to do with the auction but especially with the Japanese (moves) in global markets. We had an aggressive sell-off in (Japanese stocks) ... I think there is more liquidation of carry trades globally," one trader said.
Carry trades refer to the practice of borrowing money cheaply to invest in higher-yielding assets and make a profit.
Ten-year Italian government bond yields rose 5 basis points to 4.42 percent and Spanish yields were up 3.6 bps at 4.66 percent, but the debt of more vulnerable issuers like Portugal and Greece were particularly hard hit.
Portuguese yields rose 18 basis points to 6.62 percent and Greek yields rose 32 basis points to 10.65 percent.
Greek yields hit their highest since early May at 10.85 percent, after Athens failed to sell state gas firm DEPA on Monday, putting it at risk of missing bailout targets, and as the country slipped back to crisis mode.
Safe-haven German bonds, which have recently suffered in tandem with equities on concerns over the future of central bank stimulus, rebounded. Traders said appetite for safety was resuming after the paper had been oversold.
German Bund futures were 38 ticks higher at 143.17.
"I think we have almost got a risk of a flight-to-quality type trading coming back into Bunds," one trader said.
Alessandro Giansanti, senior rate strategist at ING said demand from domestic banks would likely support the Italian debt sale, in particular the three-year bond which falls within the scope of potential ECB bond-buying.
"I don't expect it to be a problem in terms of demand, of course it (will) be a problem in terms of pricing. The pricing will be higher than the previous auction but it is still at manageable levels for the Italian Treasury."
He said if 10-year yields moved back close to 6 percent, they would become a problem again.
Italy's one-year debt costs rose at an auction for the first time in three months on Wednesday.
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