Italy's bond yields rise as budget tensions weigh

By Virginia Furness

LONDON (Reuters) - Italian government bond yields jumped to one-month highs on Tuesday, pushed up by risk aversion on global markets triggered by sharp tech stock-led losses on Wall Street, tensions over Brexit and concerns about the Italian budget.

As Wall Street shares fell sharply for a second straight day <.SPX> and oil prices took another dive on concerns about rising global supplies, investors flocked to higher-rated bonds -- pushing German 10-year bond yields to more than three-week lows.

In Italy, the upward push on bond yields from the risk-off environment and concern ahead of Wednesday's official response from the European Union on Italy's draft budget was tempered somewhat by reassuring comments from officials.

European Central Bank policymaker Ewald Nowotny said Italy does not pose an immediate economic risk within the euro area. ECB supervisor Daniele Nouy said the rise in Italian sovereign yields is not yet big enough to cause a serious concern about the health of Italy's banks, which hold billions of euros worth of government debt. [nF9N1FR01B]

Italy's 10-year bond yield was up 2.2 basis points in late trade at 3.60 percent , off a one-month high hit earlier at 3.71 percent, while the gap over safer German peers pulled back from one-month highs around 335 bps .

Five-year bond yields rose three bps to 2.87 percent, having hit highs of 2.98 percent .

Italian bank stocks meanwhile fell to a two-year low <.FTIT8300>.

Analysts warned that the buying did not reflect a complete turn around in sentiment towards Italy.

"At the margins it has helped, but maybe there is some consolidation after the near 20 basis point widening in Italian bond spreads, the backdrop remains volatile," said Michael Leister, rates strategist at Commerzbank.

Italian bond yields initially jumped after Deputy Prime Minister Luigi Di Maio said that Italy was paying the consequences of the European Union stonewalling over the budget.

"The comment by Di Maio saying the EU is acting like a stonewall did not sound like compromise, in general (there are) growing concerns about the response of the EU Commission which is due tomorrow," said Daniel Lenz, rates strategist at DZ Bank. "Investors are even more worried than they previously were."

Budget concerns in Spain meanwhile pushed Spanish 10-year bond yields to one-month highs around 1.67 percent .

It appears likely that Spain's minority government will be unable to pass the 2019 budget, and some reports mentioned the possibility of an early general election in May 2019, wrote Rabobank analysts in a note.

Ireland's 10-year bond yields briefly hit a one-month high at 1.046 percent , continuing to underperform most of its euro zone peers in the face of Brexit uncertainty.

Germany's 10-year bond yield hit a more than three-week low at 0.34 percent and most other higher-rated bond yields also fell 2-3 bps as stocks tumbled once again.

(Reporting by Virginia Furness; Additional reporting by Dhara Ranasinghe; editing by David Stamp, William Maclean)

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