June 4 (Reuters) - Italian government bonds extended their rally on Tuesday, reassured by Prime Minister Giuseppe Conte's comments on budget discipline and rising expectations of generous stimulus measures from the European Central Bank this week.
Two-year yields tumbled 12 basis points on the day to 0.51%, a one-week low IT10YT=RR, while 10-year yields were down nine basis points to the lowest in two months at 2.48% IT10YT=RR
News that euro zone inflation fell to 1.2% in May from 1.7% in April only added to a sense that Thursday's ECB meeting is likely to prove dovish. That helped add to bond price gains generated by Conte, who said late on Monday Italy had to abide by EU budget rules until such time as they could be changed.
"There is some speculation about the upcoming ECB setting and more generous TLTROs than anticipated," said Daniel Lenz, rates strategist at DZ Bank, referring to the ECB's plan to revive its cheap loans programme for banks.
(Reporting by Dhara Ranasinghe and Sujata Rao)
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