Italy yields dip, hefty debt sale seen going well
* Italy to auction up to 9 bln euros of bonds
* Sale includes new 10-year benchmark
* Demand seen solid on positive ratings view, Renzi agenda
* Peripheral debt resilient to fresh EM concerns
* Bund futures rise as geopolitical tensions mount
By Emelia Sithole-Matarise
LONDON, Feb 27 (Reuters) - Italian bond yields hit fresh eight-year lows on Thursday before a hefty debt sale seen drawing solid demand from investors encouraged by the new government's reform plans and an improved credit rating outlook.
The sale of up to 9 billion euros of bonds includes a new 10-year benchmark is expected to go well even as tensions between Ukraine and Russia soured investors' appetite for risk-taking and boosted demand for safe-haven German Bunds.
Russia put fighter jets along its western borders on combat alert, the Defence Ministry was quoted as saying by Interfax news agency.
Lower-rated euro zone bonds have so far proven resilient to the geopolitical tensions, with investors focused on recent positive news in the currency bloc, including improved credit ratings and outlooks for Spain and Italy, as well as the naming of a new reform-minded government in Rome.
Italian 10-year yields were last 4 basis points down at 3.507 percent, their lowest since January 2006. Thursday's auction comes after Italy raised up to 12 billion euros earlier this week, the first sale under Matteo Renzi's premiership after Enrico Letta's resignation last week.
Renzi won two confidence votes in parliament this week, vowing to cut labour taxes and pass wide institutional reforms.
"We're fairly constructive on the auctions. We're seeing demand (in the grey market) for the new bond and think it will go well," a trader said.
"For now it may be more the case that European bonds are viewed as relatively safe compared to some other assets out there but whether the rally goes further, given Bunds and semi-core bonds will do better if things deteriorate in Ukraine and emerging markets, I don't know."
With German 10-year yields just 7 basis points above 2014 lows, investors were increasingly looking for the higher returns offered by peripheral euro zone debt, the trader said.
Spanish 10-year yields fell 3 bps to 3.51 percent and Irish equivalents dropped 4 bps to 3.129 percent. Junk-rated Portuguese yields were also a touch lower before a debt buyback by Lisbon aimed at easing its near-term financing needs as it prepares to leave behind an international bailout.
Rabobank strategists saw little threat to higher-yielding euro zone bonds from the fresh flare-up in emerging markets and tensions over Ukraine.
"We continue to see the odds tilted toward the periphery enjoying positive contagion on the back of emerging market tensions as investors eschew increasingly risky emerging markets but look to forego as little of the returns that they offer as possible," they said in a note.
Investors were looking too to German inflation data due later in the day, which could keep alive bets on further European Central Bank monetary policy easing. The German numbers come before the regional reports on Friday.
Bund futures were 44 ticks up at 144.90 with German 10-year yields 3.5 bps down at 1.58 percent.
"We have the German CPI and we also had these headlines about Russian jets on combat status and all this is making for a constructive market," another trader said. "The weaker inflation numbers we get, the more chance we get of an ECB response next week so there's no reason for Bunds to sell off."
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