May 23, 2018 / 7:36 AM / in a month

CORRECTED-Euro zone bond yields fall on weak French PMI, Italy steadies

(Corrects day in first paragraph to Wednesday)

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, May 23 (Reuters) - Euro zone bond yields were broadly lower on Wednesday as French business activity slowed more than expected in May, while Italy’s bonds steadied after a week of turmoil on the prospects of a spendthrift coalition government taking shape in Rome.

Most 10-year bond yields in the bloc were down 2-3 basis points after the data from France reinforced expectations for a protracted European Central Bank exit from massive monetary stimulus.

French business activity slowed more than expected in May, shifting down to its slowest pace in nearly a year and a half as a string of public holidays weighed on the service sector, a monthly survey showed.

The flash May estimates of business activity in the euro area are in focus given a recent slowing in the euro zone’s growth momentum.

Economists polled by Reuters forecast IHS Markit’s Composite Purchasing Managers’ Index, seen as a good overall indicator of growth, to dip to 54.9 in May from 55.1 That euro zone number is released later in the morning session.

In Italy, the focus was on who will lead the coalition government proposed by the anti-establishment 5-Star and far-right League.

Giuseppe Conte, the little known academic proposed by the two parties to head a coalition government has not yet been approved for the job by the head of state Sergio Mattarella.

Conte’s attempt to become Italy’s next prime minister also hit a hurdle on Tuesday following allegations that he had inflated his academic credentials.

On Tuesday, League leader Matteo Salvini said he would like to see eurosceptic economist Paolo Savona as economy minister in the government.

Italy’s 10-year bond yield was a touch higher at 2.34 percent, well off 14-month highs around 2.42 percent touched on Tuesday. The gap over benchmark German Bund yields was at 181 bps, having widened to as much as 190 bps in the previous session.

“Everybody is waiting to see what Mattarella will do,” said Martin van Vliet, senior fixed income strategist at ING.

“For me the finance minister posting is more important than who is prime minister and the option raised yesterday is a eurosceptic, which Mattarella is unlikely to be happy with.” (Reporting by Dhara Ranasinghe Editing by Catherine Evans)

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