* Italian 10-yr yield hits 3-1/2-month low
* Growth pessimism also pushes German yields near lows
* Euro zone manufacturing PMIs due
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds quote, background)
By Abhinav Ramnarayan
LONDON, Jan 2 (Reuters) - Italy’s 10-year borrowing costs hit a 3-1/2-month low on Wednesday, as markets reopened for the first time since lawmakers in Rome endorsed the government’s 2019 budget late last year.
Parliament on Saturday passed the budget, just meeting an end-year deadline following a deal last week with the European Commission that calmed financial markets and averted the risk of fines against Rome.
With bond futures trading for the first time since then, Italian bond yields dropped 4-5 basis points across the curve while 10-year BT Futures briefly hit a five-month high of 128.59 before easing a touch.
“The recent agreement between Italy and the EU over its draft budget should help lift some of the uncertainty that has weighed on the economy through the second half of last year but it will take time for that to be reflected in the PM data,” RBC economist Peter Schafer said in a note.
The first reading of the purchasing managers’ index (PM), a widely-followed indicator of economic health, for the Italian manufacturing sector is due at 0845 GMT on Wednesday.
The yield on Italy’s 10-year government bond dipped as much as seven basis points in early European trade to 2.702 percent, the lowest since Septa. 11.
It edged back up to around 2.73 percent by 0745 GMT, still down four bps on the day.
The Italy/Germany 10-year bond yield spread tightened to 251 basis points, not as dramatic a move as German yields were compressed by concerns over global stock markets and the economic outlook.
German yields were down three basis points at 0.214 percent, within a whisker of a six-month low of 0.203 percent hit on Dec. 20.
U.S. 10-year Treasury yields are close to their lowest since early February at 2.69 percent, while Japanese 10-year yields hit zero on Dec 24 for the first time since Septa 2017.
Spanish manufacturing Pm’s for the month of December are also due out on Wednesday, as are second readings of French, German and euro zone manufacturing Pm’s. (Reporting by Abhinav Ramnarayan; Editing by Tom Finn and John Stonestreet)