* 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 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
"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.