February 27, 2019 / 12:53 PM / 6 months ago

UPDATE 2-Italian yields rise on weak data, bond sale, EU criticism

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds quote, Bund/Gilt movements on Brexit headlines, updates prices)

By Virginia Furness

LONDON, Feb 27 (Reuters) - Italian government bond yields rose sharply on Wednesday, pushed higher by disappointing economic data, a debt auction and criticism from the European Commission over the state of Italy’s economy.

After an initial dip in early trade, Italian government bond yields rose up to 12 basis points across the curve, with analysts citing renewed concerns about the country’s economy.

Morale among Italian manufacturers fell to its lowest level in almost three years and consumer sentiment also declined in February after the economy dipped into recession at the end of last year.

“Today’s release points to a continuation of the soft patch for the Italian economy,” said ING economist Paolo Pizzoli.

“The recession theme will likely become more central in the domestic political debate, which is currently concentrating on the impact of recent local elections,” he said in a note.

The European Commission said Italy’s economy was facing excessive imbalances and policies of its government were making matters worse and also posed a threat to other euro zone countries.

The drop in confidence translated into higher borrowing costs for the country in a sale of new debt on Wednesday.

The yield on a new 10-year benchmark BTP bond due on Aug. 1, 2029 came in at 2.81 percent, the highest since November and up from the 2.60 percent yield paid last month on the previous 10-year benchmark.

“It is a combination of these things that has weakened the BTP market a bit,” said Peter Chatwell, rates strategist at Mizuho. “We think it is just a bit of a stumbling block but something the market is likely to get over.”

Italy’s 10-year government bond yields were last up eight basis points to 2.79 percent, having pulled back from 3-1/2 week lows hit on Wednesday.

It’s two- and five- year bond yields were seven-nine basis points higher at 0.42 and 1.71 percent respectively.

That pushed Italy’s 10-year bond yield spread over top-rated Germany to 261 basis points after it touched its tightest in three weeks at 255 basis points earlier in the session.

The spread was even wider mid-morning, but then high-grade euro zone bond yields were pushed higher by Gilt yields, which hit near three-month highs on bets of a softer Brexit, boosting chances of Bank of England rate rises.

Germany’s 10-year bond yields rose to a three-week high of 0.16 percent on the news, up four basis points on the day.

Earlier, Spanish government bond yields dipped close to more than two-year lows earlier after a storming 15-year bond sale the day before.

Syndications from euro zone sovereigns have been hugely successful this year and with orders in excess of 44 billion euros, Spain’s 5 billion euro sale of 15-year bonds on Tuesday was no exception.

Further supply is expected from the periphery, with Greece considering a bond sale next month, its second since emerging from international bailout programmes last August. (Reporting by Virginia Furness; Editing by Catherine Evans, Jane Merriman and Kirsten Donovan)

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