UPDATE 1-Italian bond yields rise as govt digs in heels on budget
* Italy/Germany bond gap returns to above 300 bps
* Bank of Italy says Italy/Germany spread must be reduced
* German Bund yields fall from 2-week highs
* US 2, 5-year bond yields hit decade highs after Fed meeting
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts to focus on Italy, adds quotes)
By Dhara Ranasinghe and Virginia Furness
LONDON, Nov 9 (Reuters) - Italy’s bond yields rose on Friday as the government held firm on its 2019 budget proposal amid tensions with the European Union.
Elsewhere German 10-year bond yields fell from more than two-week highs, leading a move lower in most euro area debt yields as weak Chinese economic data fuelled concerns about the global growth outlook.
Italy has until Tuesday to submit a new draft budget to Brussels, revising the size of its structural deficit, so that it will fall by 0.6 percent of GDP as required by EU rules, rather than rise by 0.8 percent as planned now.
Italy’s original proposal was rejected by the EU.
Economy Minister Giovanni Tria said on Friday that Italy would stand by the main pillars of its budget despite the EU Commission’s request to revise it.
Ten-year Italian bond yields climbed to 3.46 percent , their highest level in over a week, pushing the closely watched gap over safer German Bund yields back above the key 300 basis points mark.
“Right now it seems pretty clear that the Italians are not going to change the 2019 budget deficit forecast,” said Mohammed Kazmi, portfolio manager at UBP.
Kazmi said one of the reasons for that is the spread has stabilised around 300 bps.
“If we were trading towards 400 bps, they would have felt the need to change their stance, so maybe they’re taking it as a sign that investors are more comfortable with what they’re doing.”
Italy’s ruling coalition has said it will not be put off course by widening spreads, though it has previously acknowledged that it would act to prevent spreads rising to above 400 bps.
However, Tria on Friday set the bar lower, saying that at 300 bps, the spread is “worrying if it lasts for long.”
Investors in Italian government bond yields not only have to grapple with tensions between Italy and the EU, but also government infighting over the budget.
Now the Bank of Italy has weighed in on the debate, saying it hopes the government can reach a deal with the EU, warning that rising borrowing costs risk cancelling out the expansionary impact of the budget, and noting that the government’s GDP targets look ambitious.
Government growth projections have already taken a battering this week with both the European Union and the International Monetary Fund predicting lower growth rates.
Elsewhere, 10-year bond yields across the single-currency bloc were down 1-3 bps on the day.
China’s factory-gate inflation slowed for the fourth month in October, suggesting Beijing would likely roll out more stimulus in the face of trade frictions with the United States.
That overshadowed a move in short-dated U.S. Treasury yields to decade highs on Thursday after the U.S. Federal Reserve held interest rates steady but remained on track to keep gradually tightening borrowing costs.
Germany’s benchmark 10-year government bond yield fell 2.5 basis points to 0.43 percent.
Reporting by Dhara Ranasinghe; Editing by Hugh Lawson and Susan Fenton
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