Italian yields pinned at 8-year lows as new government eyed
* Investors enthused by Renzi's ambitious reform agenda
* Renzi cabinet expected this weekend
* ECB outlook, soft U.S. data support Bunds before debt sale
By Emelia Sithole-Matarise
LONDON, Feb 19 (Reuters) - Italian yields hovered at eight-year lows on Wednesday as Prime Minister-designate Matteo Renzi scrambled to assemble a cabinet that investors hope will deliver on his ambitious reform agenda.
Investors have given the 39-year old Renzi the benefit of the doubt after his centre-left leadership forced Enrico Letta to resign as prime minister last week, accusing Letta of failure to push through reforms needed to revive the economy.
Renzi, who is expected to have his new cabinet in place by the weekend, has pledged a rapid programme of reforms, including tackling the electoral and constitutional system, all within four months of taking office.
Italian 10-year yields held steady at their lowest since early 2006 at around 3.54 percent, having fallen almost 30 basis points since Thursday when Renzi threw down the gauntlet to Letta. Moody's upgrade on Friday of the outlook on Italy's creditworthiness spurred the fall in yields.
"Expectations of Renzi delivering are building day by day. It raises the question whether he can live up to the hopes and if there's risk of profit-taking in the near term," said Commerzbank strategist Michael Leister.
"It seems like sentiment and the downward momentum in peripheral yields is very strong. I wouldn't recommend to catch the falling knife. I see another five to 10 basis points (fall in Italian yields) near-term."
Italy's 10-year bond yield premium over German benchmarks has fallen to its lowest since 2011, around 190 basis points, less than half the levels hit at the height of the euro zone crisis in early 2012.
Leister and other analysts said expectations that the European Central Bank may ease monetary policy further this year to fend off deflation was also spurring demand for higher-yielding euro zone bonds.
The ECB outlook and a recent patch of soft U.S. data also underpinned demand for safe-haven Bunds ahead of a German sale of up to 5 billion euros of 10-year German bonds.
The Bund future was last 10 ticks up at 143.82 with cash yields 0.5 bps lower at 1.67 percent.