December 15, 2017 / 8:38 AM / a year ago

UPDATE 2-Greek 10-year bond yields drop to lowest since 2006

* Greek bond yields fall to lowest since 2006

* Italian bond yields up 21 bps this week

* Jitters about elections expected in March weigh

* Fitch reviews Portugal ratings

* German Bund yields at three-month lows

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites throughout, updates prices)

By Fanny Potkin and Dhara Ranasinghe

LONDON, Dec 15 (Reuters) - Greek 10-year government bonds yields hit an 11-year low on Friday, as recent upbeat economic data and a deal struck with its lenders encouraged investors to snap up Greek debt.

Greece and its euro zone creditors reached a preliminary agreement earlier in December on reforms Athens needs to roll out under its bailout programme, a move that has boosted hopes for the country to leave the aid plan in August.

Greece’s 10-year bond yield fell below 4.00 percent for the first time since 2006, down 21 basis points on the day. By late trading, Greek 10-year bond yields were at 3.95 percent.

Meanwhile, Italian bonds had were set for their worst week since July on Friday as talk of a March election renewed focus on political risks there.

Italy’s 10-year bond yields, trading at 1.80 percent , looked set to end the week around 21 basis points higher, its biggest weekly jump since early July.

The Italian parliament will be dissolved between Christmas and New Year, a parliamentary source told Reuters earlier this week, opening the way for national elections in early March that look unlikely to produce a clear winner.

That has unnerved investors, sparking an underperformance of Italian bonds versus peripheral peers and top-rated Germany.

Borrowing costs across the euro area fell 2-3 basis points a day after the European Central Bank stuck to its pledge to keep money pouring into the bloc’s economy for as long as needed.

Its outlook for inflation to remain below the ECB’s near-2 percent target in coming years as well as renewed uncertainty over the path of U.S. tax reform boosted bond demand.

The tax bill needs a simple majority to pass in the Senate, in which Republicans hold just 52 of the 100 seats. No Democrats are expected to support it.

“The short-term driver of bonds is the doubts overnight about the backing of the U.S. tax bill,” said Mizuho rates strategist Antoine Bouvet. “Also we saw yesterday that the ECB does not expect inflation to rise too much.”

Portugal was also in focus ahead of a Fitch Ratings review later on Friday that could give the once-bailed out country its second investment-grade rating from a major agency. Portugal is rated BB+ by Fitch.

Since S&P Global on Sept. 15 lifted Portugal’s rating one notch to BBB-, out of “junk” territory, investors have betted on further ratings upgrades that would allow Portugal to rejoin the big bond indexes.

Portugal’s 10-year government bonds were trading at 1.83 percent by late afternoon, after having dropped to 1.761 earlier in the day.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Dhara Ranasinghe; editing by John Stonestreet

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