June 29, 2018 / 7:24 AM / 5 months ago

Migration deal knocks German Bunds, lifts Italian bonds

* EU struggles to bridge migration rift

* But vague agreement eases fears of German govt collapse

* Higher-rated euro zone bond yields up 1-3 bps

* Italian yields down 6-9 bps

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

By Dhara Ranasinghe

LONDON, June 29 (Reuters) - German bond yields rose on Friday after an agreement among European Union leaders to tackle migration eased fears of no accord and a potential collapse in the three-month old German government.

In contrast, Italian 10-year government bond yields fell to a one-week low at 2.71 percent as the deal reached overnight lifted sentiment towards the euro zone’s riskier assets.

Tense negotiations ended in an agreement to set up joint asylum processing sites and restrict migrant moves within the bloc, but EU leaders made clear that virtually all their pledges would be carried out by member states on a “voluntary basis”.

“The outcome of the summit tells us something about the severity of the situation,” said Jan von Gerich, chief analyst at Nordea in Helsinki.

“I’m not confident it will solve the underlying issues but there was a fear that the summit would fail and we could get a collapse of the German government, so that risk premium is being priced out,” he said.

Germany’s 10-year bond yield rose 2.5 basis points to 0.34 percent, off one-month lows hit this week around 0.30 percent.

German yields were set to end June flat, after falling 22 bps in May as worries about Italian political risks gripped markets. German debt is seen as one of the world’s safest assets.

With the exception of Italy, other long-dated bond yields in the euro zone were up 1-3 bps on the day.

On Friday, a senior lawmaker from Bavaria’s Christian Social Union (CSU) gave a cautious welcome to the migration deal, saying that its implementation would be the real test.

A row over migration policy in Germany’s coalition government has raised concerns that the euro zone’s biggest economy could be headed for snap elections.

The euro firmed after the migration deal and was up 0.6 percent against the dollar, while European shares were 1 percent higher in early trade.

Focus also turned to the first estimate of euro zone inflation for June, due out later on Friday.

Economists polled by Reuters forecast that inflation rose 2 percent in June from a year earlier, compared with a 1.9 percent rise in May.

Data on Thursday showed a pick up in inflation in Germany, Italy and Spain, although analysts said market sensitivity to the data has been reduced somewhat since the European Bank this month signalled it would keep interest rates low for some time.

“Neither the expected pick-up to 2 percent of European headline inflation nor downside risks we see for the core index are expected to trigger a major market reaction since ECB President Mario Draghi has already clarified the bank’s stance on both the QE exit and the rate hike process,” Unicredit said in a note.

Reporting by Dhara Ranasinghe Editing by Catherine Evans

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