* Italy bond yields fall further after regional elections
* Rate-cut bets in euro area build
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds investor comment, updates prices)
LONDON, Sept 22 (Reuters) - Italy’s borrowing costs tumbled to multi-month lows on Tuesday on a perceived reduction in political risk as right-wing opposition leader Matteo Salvini failed to score the breakthroughs he had hoped for in regional elections.
The results of the Sept. 20-21 vote, released late on Monday, were a boost to the fragile coalition government that is battling the economic slump sparked by the coronavirus.
Italy’s 10-year bond yield fell seven basis points to around 0.87%, its lowest level since February and biggest one-day fall in nearly three weeks.
Thirty-year yields fell to their lowest since 2015 at 1.79%, , while 50-year yields touched a fresh record low at around 2.05%.
The election “was something which we saw as probably one of the few risks to Italian spreads this year,” said Nick Sanders, portfolio manager at AllianceBernstein, which manages $600 billion. He said the election result provided more confidence in maintaining his overweight position in Italian government bonds.
“We thought that, for the current coalition, there is very little incentive for a near-term election, and the outcome has effectively enhanced that view.”
The closely-watched 10-year yield gap over safe-haven Germany was its tightest since February, at around 136 basis points.
New supply from Germany and the Netherlands exerted some upward pressure on higher-rated bond yields.
Germany sold more than four billion euros of two-year bonds and the Netherlands just under 6 billion euros of a new 30-year bond.
Germany’s benchmark 10-year bond yield was up 3 basis points to -0.50%, but only slightly higher than Monday’s six-week low of -0.54%. Demand for safe-haven assets was expected to remain robust in the face of growing concern about a resurgence of coronavirus infections in Europe.
“The virus picture has become much more negative in the global north, renewing risk of lockdowns, and cementing the reality that this is a situation that will continue to dog businesses and economies into the longer term,” said Mizuho rates strategist Henry Occleston.
Dovish comments from the European Central Bank have also supported bond markets.
Investor expectations of an ECB rate cut next year have risen in recent sessions, with money markets practically pricing in a 10 bps rate reduction by July 2021.
“The thinking is that something will have to give at some point if the euro does not reverse course - hence, the speculation over a depo rate cut, which is commonly seen as the most effective policy response in terms of currency management,” said Richard McGuire, head of rates at Rabobank in London.
Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli Editing by Andrew Cawthorne and Mark Heinrich
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