UPDATE 2-Italian bond yields fall as Tria backs expansionary budget
* Tria backing boosts hopes he will stay on in govt
* Italian yields down 6-16 bps across the board
* Italy/Germany yield spread tightens to 292 bps
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates pricing, adds quotes and results of Finland auction, ZEW survey)
By Abhinav Ramnarayan and Virginia Furness
LONDON, Oct 16 (Reuters) - Italian government bond yields dropped across the board on Tuesday, narrowing the spread over German peers, after comments from Economy Minister Giovanni Tria defending the 2019 budget boosted hopes he would stay on in the turbulent government.
The expansionary budget, which was officially signed off on Monday, sets up a showdown with Brussels as it accommodates the big spending and tax cutting ambitions of the coalition partners.
However, a lot of investors’ concerns over the sharply higher deficit were already priced in, so they focused instead on the comments from Tria, an economics professor who is unaffiliated to either ruling party.
Tria said he was confident he could explain to the European Commission that Italy needed to raise spending to offset a slowing economy, and described the 2.4 percent deficit target as “normal”. Investors see Tria as a moderating influence in the government.
Italian yields were down by up to 16 basis points, with two-year yields 15 bps lower to a one-week low of 1.61 percent and 10-year yields down 11 bps at 3.45 percent.
The Italy/Germany 10-year yield spread tightened around 9 basis points to 293 bps, moving further away from a five-year peak of around 315 bps hit last week.
Italian stocks also performed well on Tuesday with the FTSE MIB up one percent.
Alessandro Balsotti, fund manager at JCI Capital, said some of the positive sentiment comes from the fact that the different factions within the government were able to compromise and agree on the budget.
“Pending more details and reactions from Europe, the market may take the coalition’s ability to reach a compromise as positive,” he said.
But Marchel Alexandrovich, European financial economist at Jefferies in London, warned that the “relative calm” seen in the market could be short lived with credit ratings reviews and third quarter GDP data due at the end of the month.
“They have managed to get through to the stage where they have agreed on the proposals and so the budget now goes to Brussels and it will most likely be rejected, but it’s not in the EU’s interests to pick a fight with Italy,” he said.
Analysts attributed the drop in Italian yields partly to more attractive valuations, and partly to a general improvement in risk sentiment, with world markets calming a touch after the wild swings of last week.
Spanish and Portuguese 10-year bond yields were also lower on the day, with Portugal six basis points lower at 1.95 percent and Spain down two bps to 1.67 percent.
High-grade euro zone government bond yields were also a touch lower, having dropped sharply over the past week on a bid for safe assets.
Germany’s 10-year yield was largely unmoved after monthly data showed economic sentiment among investors deteriorated in October.
The euro zone benchmark was steady at 0.50 percent, hovering above two-week lows of 0.478 percent hit on Monday.
Elsewhere Finland raised 1 billion euros with a tap of its existing government bonds maturing 2028. (Reporting by Abhinav Ramnarayan; additional reporting by Danilo Masoni in MILAN; Editing by Dhara Ranasinghe, Andrew Heavens and David Stamp)
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