* Southern European debt in demand in “buy the dip” trade
* Italian yields 4 bps lower, still 10 bps higher for the week
* Italy’s League says leaving the euro not a priority
* Draghi to speak on Friday afternoon
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites top of story)
By Abhinav Ramnarayan
LONDON, May 11 (Reuters) - Investors bought up Italian government bonds on Friday, taking advantage of a recent sharp rise in yields and soothed by some moderate comments from anti-establishment parties that are likely to form Italy’s next government.
Italian 10-year yields <IT10YT=RR) were set for their biggest weekly rise since February, but they did drop 4 basis points on Friday as Italy’s 5-Star and League parties seek a coalition agreement in the coming days.
On Friday a 5-Star source told Reuters a new government will be “rational and reasonable” on public accounts while a top League senator said Italy’s exit from Europe’s single currency is not among the party’s priorities.
The comments address two of the main concerns investors have about the potential coalition of the two unconventional parties.
“The League is reported as saying that (leaving the) euro was not one of the priorities, this gives investors confidence to buy the dip,” said DZ Bank analyst Pascal Segesser. “Also in general there’s a feeling that because of Macron and Merkel, there will be some stability in the region.”
Spanish and Portuguese 10-year borrowing costs also dropped 2 basis points each, the three Southern European countries outpacing better-rated peers at the end of a week in which Italian political worries had hurt “peripheral” debt. ,
In addition, one of Italy’s problem banks, Monte dei Paschi di Siena, swung to a first-quarter net profit of 188 million euros ($224 million) helped by falling writedowns and cost cutting.
Central bankers around the world also appear to have become even more cautious as concerns over inflation and international trade cloud the global economic picture.
On Thursday alone, the Bank of England held rates against recent expectations and New Zealand’s Reserve Bank said the official cash rate will remain at 1.75 percent for “some time to come”.
This leaves the U.S. Federal Reserve as the only major central bank committed to rate hikes, but lower-than-expected inflation in the world’s largest economy has put some doubt over the pace of these hikes.
The U.S. Consumer Price Index, the government’s broadest inflation gauge, increased 0.2 percent in April, less than the 0.3 percent rise projected by economists polled by Reuters.
Later on Friday, European Central Bank President Mario Draghi is due to give the State of the Union address in Florence, and the market will be watching for any comments on bond purchases.
“Anything he says on when the asset purchase programme may end might affect Italy, BTPs might react,” said Segesser of DZ Bank.
Outside of Southern Europe, most euro zone government bond yields unchanged to a touch higher. The yield on 10-year German government bonds, the benchmark for the bloc, was up a basis point at 0.55 percent. (Reporting by Abhinav Ramnarayan Editing by Richard Balmforth/Keith Weir)
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