* Italy/Germany bond yield spread tightest in six weeks
* Other bond yields rise ahead of Thursday’s ECB meet
* German Bund yield hits one-month high of 0.42 pct
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds market reaction to Barnier)
By Abhinav Ramnarayan
LONDON, Sept 10 (Reuters) - The gap between Italian and German 10-year borrowing costs was at its tightest in six weeks on Monday, after Italy’s Economy Minister Giovanni Tria predicted yields would drop as the government laid out its budget for 2019.
Italian debt rallied last week after government officials suggested Italy’s upcoming budget would stay within European Union fiscal rules and not strain the country’s massive debt.
Tria’s specific mention of the Italian bond market on Sunday, together with his promise of prudent fiscal measures, gave the rally fresh legs on Monday, sending yields sharply down to six-week lows.
“Italian bond yields are witnessing an extension of the theme from last week. Tria’s comments are positive for investors,” said Mizuho strategist Peter Chatwell.
The Italy/Germany 10-year bond yield spread shrank to around 232 basis points, almost 60 bps below last week’s widest levels.
Italian yields were down 13 to 17 basis points across the curve, hitting fresh six-week lows .
Italy’s 10-year bond yield was at 2.74 percent in late trade.
But the Italy/Germany bond-yield spread, which investors often use as an indicator of sentiment towards the euro zone, still remains elevated compared with the levels before May, when it was as tight as 114 bps.
That reflects concern over the government’s plans on spending and European integration, and the fact that investors still worry about the future of the euro zone’s third-largest economy.
In the short term, though, Chatwell said that if broader sentiment towards emerging markets stabilises, then Italian bonds could benefit even more, since $19 billion of bond redemptions are due in the coming week.
The European Central Bank meets on Thursday, just weeks before a new halving of monthly asset purchases in October that will mark the next step in the unwinding of its massive monetary stimulus.
Most euro zone government bond yields outside Italy were a touch higher on the day. Germany’s 10-year bond yield hit a one-month high of around 0.42 percent.
Demand for safe-haven bonds was also hurt by growing hopes of a Brexit deal, with sterling rallying.
The European Union’s Brexit negotiator Michel Barnier told a forum in Slovenia on Monday that a divorce deal with Britain could be agreed in six to eight weeks if negotiators were realistic in their demands.
“One of the reasons why the pound has been so subdued is simply because people have been pricing in a no deal Brexit, so any scope for a deal to be achieved, particularly coming from one of the chief negotiators is a bullish signal,” said Craig Erlam, market analyst at OANDA.
Additional reporting by Saikat Chatterjee and Dhara Ranasinghe; Editing by Alison Williams