* Italy/Spain bond yield spread at highest since 2012
* Trump says to support Italian debt
* Fed’s Powell to speak at Jackson Hole on Friday
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Virginia Furness
Aug 24 (Reuters) - Italian bond yields matched their highest level over Spain since 2012 on Friday as the economic and fiscal trajectories of the two countries diverge and investors ignored supportive comments for Italy from U.S. President Donald Trump.
Concerns over Italy’s burgeoning deficit have spooked bond investors and ratings agencies while Spain has made progress in controlling public finances.
On Friday, a flareup between Italy’s government and the European Commission over migrants also renewed concerns about Rome’s relationship with the EU.
Deputy Prime Minister Luigi Di Maio repeated threats to suspend EU funds over the distribution of migrants waiting to disembark from a ship docked in an Italian port.
Italy’s bond yields rose 4-7 basis points across the curve with the 10-year government bond reaching 3.14 percent, its highest level in a week.
Italian risk performance continues to diverge from the rest of southern Europe, and the spread of Italian 10-year bonds over Spain reached 174 bps, matching their highest level over Spain since 2012.
“Many investors fear the fiscal outlook for Italy will deteriorate, whereas for Spain it has brightened as seen in the ratings upgrades,” said ING strategist Martin van Vliet.
“It is also worrying that Salvini is talking about market attacks and economic attacks, it is reminiscent of (Turkish President) Erdogan,” he added.
Italian Deputy Prime Minister Matteo Salvini said this week the government would stand up to any market attacks or debt downgrades that may come its way.
The move higher in Italian yields follows a brief respite on Friday after a report that U.S. President Donald Trump had offered Italy to help with its public debt.
Strategists struggled to make sense of Il Corriere della Sera’s report that Trump had told Italian Prime Minister Giuseppe Conte at a meeting in Washington in July that the United States was ready to help Italy with its debt next year.
“This is clearly dominating headlines this morning and it probably explains the pop at the open, but traders who look into the details of this should be quick to fade the move,” said Commerzbank’s head of rates strategy Christoph Rieger.
“I would be cautious though as the U.S. has no sovereign wealth fund and neither the U.S. Treasury nor the Fed have any mandate for such interventions.”
Markets will listen closely to a speech by Federal Reserve Chairman Jerome Powell later on Friday after minutes from the U.S. central bank’s most recent meeting showed that further interest rate hikes are likely soon.
But the anticipation of Powell’s speech barely moved U.S. Treasuries on Thursday as expectations that the Fed will hike rates in September remained stable.
German bunds remain off recent lows at 0.35 percent after Eurozone PMIs failed to excite yesterday. Recent data has shown all sectors of the German economy grew in the second quarter.
Reporting by Virginia Furness; Editing by Ros Russell and Andrew Roche