Italian debt in demand as political storms abate

By Abhinav Ramnarayan

LONDON (Reuters) - The spread between Italian and German 10-year borrowing costs narrowed on Tuesday as positive news from a summit between North Korea and the United States followed reassuring comments from Italy's new economy minister.

The closely watched yield spread narrowed to its tightest in over a week , though moves in the euro zone bond market were small relative to the volatile trade of recent days, ahead of this week's key central bank meetings.

U.S. President Donald Trump and North Korean leader Kim Jong Un signed a "comprehensive" document on Tuesday following a historic summit in Singapore, promising to work toward complete denuclearization of the Korean peninsula.

This added to Monday's relief rally in Italian assets after Economy Minister Giovanni Tria told the Corriere della Sera newspaper on Sunday the coalition was committed to remaining in the euro zone.

"There is some positive sentiment from the North Korea news, even though a lot of the progress has been priced in already," said ING strategist Benjamin Schroeder. "Also I think the move today is a continued reaction to the headlines from ... Italy."

The Italian/German 10-year bond yield gap briefly narrowed to 225 bps, its lowest in a week and compared with a gap of 268 bps at the end of last week.

It had widened back to around 240 bps by late trade as long-dated Italian bond yields rose slightly.

Two-year Italian bond yields were down 7 bps at 1.05 percent .

Germany's 10-year bond yield briefly reached its highest level in almost three weeks at 0.519 percent before pulling back to around 0.49 percent.

Analysts said the outcomes of central bank meetings could move the market as the week progresses.

The U.S. Federal Reserve is widely seen hiking rates on Wednesday at the end of a two-day policy meeting, while the European Central Bank is expected to provide details on the unwinding of its 2.55 trillion euro ($3 trillion) bond buying program on Thursday.

Data on Tuesday showed U.S. consumer prices rose marginally in May.

Earlier in the day, a survey by Germany's ZEW Institute showed the mood among German investors tumbled in June to its lowest level since September 2012, weighed down by concerns about the impact of an escalation in a trade dispute with the United States.

In Britain, data showed British workers' wages grew more slowly in the three months to April, which could further curb expectations that the Bank of England will raise interest rates as soon as August.

(Reporting by Abhinav Ramnarayan; editing by Larry King)

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