August 7, 2018 / 7:43 AM / 2 months ago

German bond yields pinned near almost two-week lows

* Bund yields hold below 0.4 pct

* Broader euro zone bond market stable

* Focus remains on Italy

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

By Dhara Ranasinghe

LONDON, Aug 7 (Reuters) - Borrowing costs for euro zone benchmark issuer Germany were pinned near their lowest levels in almost two weeks on Tuesday as concerns about global trade and turbulence in Italy continued to support demand for the least risky assets.

While Italian bond yields have pulled back from two-month highs hit on Friday, analysts said the market remained vulnerable to political noise especially at a time when thin summer trading can exacerbate market moves.

Uncertainty about what scale of fiscal largesse to expect from upcoming Italian budget talks given a pledge by the anti-establishment government to ramp up spending has unnerved financial markets.

Senior government officials will meet on Wednesday to discuss next year’s budget, Deputy Prime Minister Luigi Di Maio said on Tuesday.

Those uncertainties, plus simmering trade-war fears, have helped push yields on Germany’s benchmark 10-year Bund yield down by 11 basis points from seven-week highs set last week. It was trading at 0.39 percent, close to almost two-week lows hit on Monday.

“What is remarkable at the moment is the strength in core bond markets,” said Commerzbank rates strategist Rainer Guntermann. “There is a fundamental case for investors to remain more risk-averse given the Italian budget talks coming up.”

Di Maio said the coalition government will hold several meetings to define the budget.

Senior officials of the new executive said after a meeting last week they had reached a compromise on the outline of the next budget.

Italian bond yields were a touch higher early on Tuesday but that move was in line with the broader euro zone debt market.

In Japan, meanwhile, 30-year bond yields hit a nine-month high ahead of an auction later this week.

Japanese yields have risen sharply in the last week as markets tested limits of the Bank of Japan’s commitment to allow yields to move more flexibly.

There was some focus on a Reuters story that the Bank of Japan has abandoned two attempts to raise rates this year.

The U.S. Treasury will kick off its latest auction round later in the day with a $34 billion sale of three-year bonds. (Reporting by Dhara Ranasinghe; Editing by Catherine Evans)

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