Italy's bond yields dip, German Bund yields rise on reflation bets

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, Feb 8 (Reuters) – Italy’s 10-year bond yield hovered close to one-month lows on Monday, as Mario Draghi’s prospects of forming a new government received a boost after the two largest parties in the Italian parliament offered their conditional backing.

Most other euro zone bond yields, especially in safe-haven Germany, edged up in the face of a more upbeat tone in world markets and a selloff in long-dated U.S. Treasuries on expectations for more stimulus that will boost growth and inflation.

But it was Italy, which last week saw the biggest weekly fall in 10-year bond yields in months, that remained in focus in the euro area.

The anti-establishment 5-Star Movement and the rightist League on Saturday gave their backing to Draghi, who was asked last week to form a government after the previous ruling coalition collapsed.

While Draghi’s route to power is still not clear, signs of support from some of the biggest parties in the Italian parliament helped support Italian bonds in early Monday trade.

Italy’s 10-year bond yield was a touch lower at 0.53% , hovering near almost one-month lows hit on Friday. At current levels, the yield is just 6 basis points away from record lows hit late last year.

That left the gap over benchmark 10-year Bund yields at around 95 bps — close to its tightest levels in five years.

Having completed a first round of formal consultations with parties on Saturday, Draghi will hold more talks this week aimed at drawing up a cabinet, a broad policy agenda and establishing the make-up of a ruling coalition.

A combination of reduced Italian risks and U.S. stimulus expectations added to upward pressure on borrowing costs in higher rated bond markets such as Germany, France and the Netherlands.

Germany’s 10-year bond yields was last up 3 bps on the day at -0.415%, heading towards five-month highs hit on Friday.

“Some headwinds for Bunds look set to extend and should keep Bunds vulnerable near-term,” said Commerzbank rates strategist Rainer Guntermann.

“Risk sentiment seems to be improving further, there are signs for broad-based support of a Draghi-led government in Italy and signs for support of (U.S. President Joe) Biden’s stimulus in the U.S. Congress, which could further fuel the global reflation sentiment.”

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