* ECB report soothes nerves before Italian, Austrian votes
* Italian spread over German 10-year yield falls to 176 bps
* Extra focus on Italy after Monte dei Paschi rescue plan
* Oil prices soar as OPEC meets
By Abhinav Ramnarayan
LONDON, Nov 30 (Reuters) - Euro zone government bond yields fell on Wednesday on expectations the European Central Bank would step in and buy Italian government bonds should this weekend’s referendum go against Prime Minister Matteo Renzi.
Uncertainty before Wednesday’s OPEC meeting bolstered the price move, but a Reuters report on Tuesday that the ECB was ready to temporarily step up purchases of Italian government bonds if its borrowing costs spiked was the primary driver.
“This reaction function does indicate that the ECB is aware of the important support that quantitative easing lends to the periphery,” ING strategist Padhraic Garvey said.
Italian and Austrian government bonds clawed back this week’s losses before this Sunday’s votes in each country. Austrians choose a president in a repeat election that could produce the first far-right head of state in the European Union.
The yield on Italy’s 10-year bond fell 3 basis points (bps) to 1.95 percent before rising to 1.96 percent.
Most other euro zone bonds were also down 2 bps to 4 bps.
This represents something of a recovery, particularly among lower-rated bonds, which have sold off on concerns over political events and what they might mean for the future of the single currency bloc.
Polls suggest that a “No” vote is likely in Italy’s referendum on constitutional change which could render Renzi’s position untenable.
This in turn could jeapordise the country’s ailing banking sector at a time when lender Monte dei Paschi has just embarked on a rescue plan.
Italy’s 10-year yield, for example, touched a high of 2.16 percent on Friday and the spread to German equivalents hit 190 bps mark, the highest closing level since May 2014.
This spread stood at 176 bps on Wednesday, and could fall all the way to 160 bps, according to Rabobank strategists, which has traditionally been the “ceiling” for this particular spread.
However, the strategists warned there were some question marks over the nature of the support the ECB can provide for Italian government bonds.
“Such a move might be seen as blurring the border between QE and OMT which one would argue would require governing council approval,” they said in a note, referring to the Outright Monetary Transactions (OMT) programme which allows the ECB to buy euro zone government bonds to provide financial assistance.
Higher-rated euro zone bond yields fell even more sharply, with Germany’s 10-year bond yield dropping 3 bps to 0.20 percent, a move mirrored by Dutch and Austrian benchmarks.
“Moves in oil have been a little wild again recently, with the build up to the OPEC meeting offering the usual mix of rhetoric that leaves traders none the wiser about whether a deal is likely to be struck,” OANDA analyst Craig Erlam said.
Brent crude was up 5.5 percent at $48.95 a barrel, erasing Tuesday’s losses.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Louise Ireland)