Italian yields dip before GDP data as political crisis eases
* Italian Q2 data seen showing easing recession
* Scant supply, ECB policy outlook help Italian bonds
* Bunds steady before German industrial data
* ECB's Praet affirms bank could cut rates further
By Emelia Sithole-Matarise
LONDON, Aug 6 (Reuters) - Italian bond yields fell on Tuesday, extending the previous day's falls on expectations data later in the day will show the country's economic contraction easing as a political crisis wanes.
Comments by European Central Bank policymaker Peter Praet affirming that the central bank could cut interest rates further if warranted by the inflation outlook also underpinnned demand for most euro zone bonds.
Italian 10-year yields were down 3 basis points at 4.26 percent, tightening their yield premium over German Bunds by 4 bps on the day to 257 bps.
The yields hit a six-week low on Monday after upbeat services activity data and as the threat of a fresh government crisis ebbed after former premier Silvio Berlusconi, convicted of tax fraud, said the ruling coalition should continue for the sake of the country.
Italian industrial output and second quarter gross domestic product data due later in the day are forecast to show that a long recession in the euro zone's third biggest economy may be drawing towards an end.
"We've already had positive economic data out of Italy yesteday so investors are becoming more conscious that growth will pick up later in the year," said ING strategist Alessandro Giansanti.
"In the euro zone broadly we have seen leading indicators starting to pick up and if investors get more confirmation of improved conditions they will contine to buy Italian and Spanish bonds ... There's no big risk of having early elections after Berlusconi's comments so spreads will continue tighter."
Spanish 10-year yields followed Italian counterparts lower, and were last 3 bps down at 4.55 percent. The ECB's accommodative policy as well as its as-yet-untested bond purchase scheme have helped Italian and Spanish bonds weather simmering political tensions in the two countries.
Bund futures were down 11 ticks at 142.11 with German 10-year yields up 1 basis point at 1.70 percent before German industrial data expected to show an improvement in the region's biggest economy.
"I suppose considering how strong data has been recently, people will be looking for any signs of stabilisation or a pullback ... But it looks like another sideways trading day," one trader said.