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* Italy to sell 10-year benchmark debt via auctions
* Sale to test of risk appetite amid political tensions
* Italy yields up 4 bps to 4-week high
* German inflation due later on Monday
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, July 30 (Reuters) - Italy’s 10-year bond yield hit a four-week high and the spread over Germany widened on Monday ahead of a key auction that should test investor risk appetite amid political tensions in the euro zone’s third largest economy.
Italy is set to sell debt via auctions around 1000 GMT on Monday, including a new 10-year benchmark bond, with investors having shed this debt in recent weeks as a coalition of anti-establishment parties came into power.
The deal is also a test of whether the European Central Bank’s cautious approach to withdrawing stimulus will be enough to counter concerns around Italy’s spending plans and its stance on euro zone membership.
“There has been some pressure from (League leader Matteo) Salvini on the euro-friendly finance minister, which has pushed spreads wider as well as concerns over what budget the Italians will present to the EU,” ING strategist Benjamin Schroeder said.
Several Italian newspapers reported this month that Salvini was one of those to issue an ultimatum to Economy Minister Giovanni Tria to back the government’s nominees to head key companies or resign.
On Friday, the founder of the 5-Star Movement, the League’s coalition partner, said Italy should have a “plan B” to quit the euro zone if economic conditions dictated it, remarks likely to fuel new doubts on Italy’s dedication to the single currency.
Analysts believe there should still be demand for the debt because of the ECB’s approach to withdrawing stimulus. Though the bank is set to end its bond-buying scheme this year, it has said it will not hike rates through the summer of 2019.
“The ECB with its forward guidance has basically fixed this carry trade until the next big event,” said Schroeder of ING.
Carry trade is industry parlance for using low borrowing costs to buy higher yielding assets such as Italian government debt.
The yield on Italy’s existing benchmark 10-year bond rose 3 basis points to a four-week high of 2.77 percent on Monday.
The closely watched Italy/Germany spread stretched to 237 bps, its widest since July 12 .
Other euro zone bond yields were a touch lower on the day ahead of the release of German consumer price data due at 1200 GMT, with investors watching for any uptick on “core” inflation, after stripping out the effect of energy and food prices.
The yield on Germany’s 10-year bond dipped slightly to 0.405 percent.
Spanish consumer prices rose 2.3 percent year-on-year in July, flash data showed on Monday, unchanged from a month earlier and below a consensus forecast of 2.4 percent.
The market will be keeping a close eye on the Bank of Japan meeting on Tuesday, when policymakers may provide detail on a potential tweak in the country’s vast stimulus programme.
On Monday, Japanese 10-year bond yields hit their highest since February 2017 at 11 bps before closing at 9.5 bps. (Reporting by Abhinav Ramnarayan Editing by Jamie McGeever and Robin Pomeroy)