June 12, 2018 / 7:34 AM / in 10 days

Italian debt in demand as political storms abate

* Italy/Germany spread narrows to tightest level in a week

* NKorea/U.S. agreement adds to Italy relief

* Central bank meetings key as week wears on

* U.S. inflation due out later on Tuesday

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

By Abhinav Ramnarayan

LONDON, June 12 (Reuters) - The spread between Italian and German 10-year borrowing costs narrowed on Tuesday as positive news from a summit between North Korea and the United States followed reassuring comments from Italy’s new economy minister.

The closely-watched yield spread narrowed to its tightest in a week in early deals, though moves in the euro zone bond market were small relative to the volatile trade of recent days,

U.S. President Donald Trump and North Korean leader Kim Jong Un signed a “comprehensive” document on Tuesday following a historic summit in Singapore, promising to work toward complete denuclearisation of the Korean peninsula.

This added to Monday’s relief rally in Italian assets after Economy Minister Giovanni Tria told the Corriere della Sera newspaper on Sunday the coalition was committed to remaining in the euro zone.

“There is some positive sentiment from the North Korea news even though a lot of the progress has been priced in already,” said ING strategist Benjamin Schroeder. “Also I think the move today is a continued reaction to the headlines from ... Italy.”

Italian 10-year government bond yields were 4 basis points lower on Tuesday at 2.81 percent, pushing the spread over Germany down to 232 bps.

Earlier in the session that spread - seen by many investors as a measure of sentiment towards the euro zone as a whole - went as tight as 227 bps, its lowest in a week and compared to a gap of 268 bps at the end of last week.

Top-rated euro zone government bond yields were 1-2 bps higher across the board, with Germany’s 10-year yield, the benchmark for the region, up 1.5 bps at 0.51 percent.

Analysts said the outcomes of upcoming key central bank meetings could move the market as the week progresses.

The U.S. Federal Reserve is widely seen hiking rates on Wednesday at the end of a two-day policy meeting while the European Central Bank is expected to provide details on the unwinding of its 2.55 trillion euro bond buying programme on Thursday.

U.S. May consumer price inflation is due on Tuesday, with a Reuters poll showing expectations of 2.7 percent year-on-year.

Germany’s ZEW Institute also publishes its Economic Sentiment survey for June. DZ Bank analysts said it could disappoint because it was conducted while the Italian government bond market was being roiled by political concerns.

In the UK, the jobs report is due at 0830 GMT. Gilt yields were marginally higher. (Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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