October 26, 2018 / 7:52 AM / 19 days ago

Pessimism on Italy, U.S. tech earnings push German yields to 6-week low

* Bund yields edge lower as stock markets tank again

* Italian short-dated yields higher ahead of S&P review

* Euro zone inflation expectations nearly lowest in a year

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

By Abhinav Ramnarayan

LONDON, Oct 26 (Reuters) - German borrowing costs hit a six-week low as pessimism over Italian budget talks and disappointing updates from U.S. tech giants Amazon and Google drove investors to the safety of the world’s best-rated government bonds.

Euro zone yields were already near lows on Thursday after the European Central Bank stuck to plans to claw back stimulus, but its chief Mario Draghi acknowledged a loss of growth momentum and a “bunch of uncertainties” ahead.

On top of this, U.S. Treasury yields fell close to a two-week lows overnight on the back of a lower-than-expected holiday season sales outlook from Amazon and a revenue estimate miss from Google-owner Alphabet Inc.

European stocks fell a hefty 1.25 percent on Friday morning, also hurt by lower earnings expectations for some European firms.

“Expectations for U.S. company earnings is quite high, so whenever they are not being met, the reactions are quite severe,” said BayernLB credit strategist Miraji Othman.

“You also have the risk factors regarding Italy and its budget deficit. Everything comes together at the moment and have left people quite pessimistic,” he said.

German Bunds, seen as one of the world’s safest and most liquid assets, saw their yields drop two basis points to 0.378 percent in early trade on Friday; 20 bps lower than where it was just two weeks ago.

ITALY RATING

Italian bonds weakened along with European stocks and ahead of a ratings review from S&P Global due later on Friday. The ratings agency currently has Italy at a BBB rating with a stable outlook.

Italy’s two-year yields were four basis points higher at 1.52 percent, and five-year yields were up 2 bps at 2.84 percent.

The country’s 10-year yields were unchanged at around 3.50 percent and the closely-watched spread over Germany was at 313 bps.

Expectations among analysts are divided on whether the agency will downgrade Italy to its last investment grade rating or only change the outlook to negative.

Moody’s last week downgraded Italy to Baa3, just a notch above junk, but said the outlook was stable, leading to something of a relief rally.

“The Moody’s decision has taken some of the pressure off Italy. I think S&P is more likely to change the outlook,” said Othman of BayernLB.

Most other euro zone bond yields were slightly lower on the day, by about 1-2 bps. (Reporting by Abhinav Ramnarayan Editing by Andrew Heavens)

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