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UPDATE 2-Italy's five-year bond yield turns negative in U.S. election aftermath

* Euro zone periphery govt bond yields (Updates prices for close, adds ECB comment)

AMSTERDAM, Nov 5 (Reuters) - Italy’s five-year bond yield turned negative on Thursday for the first time, as the prospect of gridlock resulting from the U.S. election supported riskier financial assets.

Democrat Joe Biden edged closer to victory in the U.S. presidential race on Thursday. But Democrats were falling short of expectations in Congressional elections, with the Senate looking likely to stay in Republican hands.

That prompted investors to unwind bets on a big new stimulus package, and on Thursday stock markets rose on expectations gridlock would make major policy changes unlikely.

Moves on safe-haven German bond yields were less pronounced than on U.S. Treasuries. Germany’s 10-year yield was unchanged on the day at -0.64%, 10-year Treasury yields briefly fell to three-week lows before drifting higher .

The outperformance of U.S. Treasuries pushed the gap between 10-year U.S. and German yields to tighten further on Thursday, to its lowest in over a week, at around 138 basis points.

“European bond yields don’t seem to be moving very much compared to U.S. bond markets, they’re sort of de-linked, which is interesting,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“It could just be that the ECB has such a massive control over them that they are not as sensitive. They’ve been gradually losing sensitivity, I’d say, over the last few months, especially since the ECB got really busy again.”

Lower-rated southern European bonds, which rallied together with Bunds and Treasuries on Wednesday, continued to benefit on Thursday.

Italy’s five-year yield turned negative for the first time, and its 10-year yield also fell to a record low at 0.607%. The yield gap with German 10-year bonds dropped to 125 basis points, its lowest in a week and a half.

Support from the European Central Bank, which committed last week to providing additional stimulus in December, has pushed southern European bond yields to record lows despite the recent surge in coronavirus cases.

The ECB’s top policy “hawk” Jens Weidmann on Thursday threw his weight behind the bank’s response to the coronavirus pandemic but warned governments they should not expect this largesse to last forever.

“If there is a risk in the world that means that interest rates stay lower for longer, that doesn’t increase the risk of the euro (area) breaking up, then (Italian bonds) are a higher-yielding way of making some money as well as being safe,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

The European Union edged towards finalising its next budget and 800 billion-euro coronavirus recovery fund -- a key driver of low southern European bond yields -- on Thursday, but the European Parliament and EU countries still have to approve the agreement.

Reporting by Yoruk Bahceli; additional reporting by Elizabeth Howcroft and Dhara Ranasinghe in London; editing by Larry King