UPDATE 1-Italy bond yields tumble as Salvini falls short

* Italy bond yields fall further after regional elections

* Rate-cut bets in euro area build

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts with move to 7-month low, adds fresh comment)

LONDON, Sept 22 (Reuters) – Italy’s borrowing costs tumbled to multi-month lows on Tuesday on a perceived reduction in political risk as right-wing opposition leader Matteo Salvini failed to make the breakthroughs he had hoped for in regional elections.

The results of the Sept. 20-21 vote, released late on Monday, were a boost to the fragile coalition government which is battling with the economic slump sparked by the coronavirus.

Italy’s 10-year bond yield fell 6 basis points to around 0.88%, its lowest level since February. It was poised for its biggest one-day fall in almost three weeks.

Five-year Italian bonds yields tumbled 6 bps also, to 0.26% , the lowest since early March, 30-year yields fell to their lowest since 2015 at around 1.82% and 50-year yields hit a fresh record low at around 2.07%.

The closely-watched 10-year yield gap over safe-haven Germany was its tightest since February at around 140 bps. .

“This limits concern over the longevity of the often fractious ruling partnership between the 5-Star Movement and the Democratic Party,” said Richard McGuire, head of rates at Rabobank in London, referring to the regional elections.

New supply from Germany and the Netherlands this session put some upward pressure on bond yields elsewhere in the euro area.

Germany sold more than four billion euros of two-year bonds and the Netherlands was selling a new 30-year bond.

Still, selling pressure in European bonds was largely offset by demand for safe-haven assets in the face of growing concern about a rise in coronavirus cases in Europe.

Germany’s benchmark 10-year bond yield was marginally higher on the day at -0.52%, keeping Monday’s six-week low of -0.54% in sight.

“The virus picture has become much more negative in the global north, renewing risk of lockdowns, and cementing the reality that this is a situation that will continue to dog businesses and economies into the longer-term,” said Mizuho rates strategist Henry Occleston.

Dovish comments from the European Central Bank have also supported bond markets, with ECB chief Christine Lagarde saying on Monday the bank is attentive to euro strength.

Investors’ expectations for an ECB rate cut next year have risen in recent sessions, with money markets now fully pricing in a 10 bps rate reduction by July 2021.

“The thinking is that something will have to give at some point if the euro does not reverse course – hence, the speculation over a depo rate cut, which is commonly seen as the most effective policy response in terms of currency management,” said Rabobank’s McGuire.

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