June 28, 2018 / 8:23 AM / a year ago

Italian yields slip before key bond auction as politicians reassure on policy

* Italian 5, 10-yr yields dip 3-4 bps ahead of auction

* Eurosceptic senator says Italy “no threat” to euro

* Other euro zone yields edge higher as inflation numbers filter in

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

By Abhinav Ramnarayan

LONDON, June 28 (Reuters) - Italian government bond yields dropped on Thursday before a crucial debt auction, as the country’s politicians sought to play down their eurosceptic and fiscal stances, while yields in Germany and the broader euro zone steadied after recent falls.

A European Union summit scheduled to begin later in the day could prove disruptive to bond markets as embattled German Chancellor Angela Merkel seeks a continent-wide agreement on migration.

The row over migration policy had raised fears for Germany’s coalition government, pushing down Bund yields to near one-month lows on Tuesday.

Before the summit kicks off, Italy will auction five- and 10-year bonds in what will be a test of investors sentiment towards a market which has been hammered in recent weeks on fears a coalition between anti-establishment parties, the 5-Star Movement and the League, would embark on high-spending policies.

A prominent League eurosceptic senator told Reuters Italy’s new government will do nothing to undermine the euro and investors have no reason to fear its agenda.

Analysts cited local reports that tax cuts and a citizen’s income will not be implemented next year as another factor boosting Italian government bonds.

“The general tone from the Italian government has been a little bit more conciliatory, which has given markets some comfort that the budget deficit should stay under control,” said DZ Bank analyst Andy Cossor.

Italy’s 10-year government bond yields slipped 2.5 basis points at 2.80 percent, and the spread over Germany at 248 bps was comfortably off recent wide levels.

Italy’s five-year yields were lower 4 bps at 1.88 percent.

BBVA strategist Jaime Costero Denche said the five-year sector remains the most volatile part of the curve so the 10-year should prove more attractive.

“Both are rich bonds at the micro level due to low-coupon nature of the bonds,” he said.

Meanwhile other euro zone yields edged higher as inflation numbers from three of the larger euro zone nations filtered in. Initial readings on Spanish consumer prices showed they rose 2.3 percent year-on-year in June, the highest since April 2017.

Inflation data from Italy is due out at 0900 GMT and Germany at 1200 GMT, with Reuters polls suggesting the numbers will be 1.3 percent and 2.1 percent respectively ahead of Friday’s euro zone inflation flash estimate.

Yet these numbers don’t hold the weight they normally do, with the European Central Bank — which targets inflation of just below 2 percent — having set out guidance for monetary policy for the next 18 months.

“Given what the ECB said after its last meeting, I think it’s unlikely that inflation data today or tomorrow is going to lead to a significant shift in how policy is going to play out,” said Cossor of DZ Bank. (Reporting by Abhinav Ramnarayan Editing by Peter Graff)

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