By Yoruk Bahceli and Tommy Wilkes
LONDON, Aug 29 (Reuters) - Italian and Greek bond yields hit record lows on Thursday after Italy's president gave Giuseppe Conte the green light to head a new coalition government, fuelling demand for risk assets.
Italian President Sergio Matarella gave Conte a fresh mandate to form a government comprising the ruling 5-Star Movement and opposition Democratic Party (PD). This means snap election risks have receded, easing economic uncertainty.
Lower Italian political risk has given yield-hungry bond investors an excuse to snap up Italian and Greek debt in a market where most sovereign euro zone bonds have a negative yield.
Rabobank estimates that Italy accounts for around 62% of euro zone government bonds offering a yield above zero.
Italy's 10-year bond yield tumbled almost 10 basis points to a record low of 0.93% IT10YT=RR, before steadying. Longer-dated Italian bonds also fell sharply with the 50-year yield IT50YT=RR hitting a record low of 2.148%, down 13 bps on the day and almost 45 bps this week.
The closely-watched gap between Italian and German 10-year bond yields tightened to 161 bps, the tightest since May 2018. It was almost 8 bps tighter from Wednesday's closing levels and 30 bps tighter this week.
Expectations for fresh European Central Bank stimulus next month have also buffered Italy's bond market from political risks.
"We expect the ECB's quantitative easing is on the way, so people will trade the good news and look through the negative aspects of [the Italian coalition] being potentially short-term," said Lyn Graham-Taylor, fixed income strategist at Rabobank.
The coalition deal also helped Italy auction a five-year bond at a yield of 0.32%, the lowest since a September 2016 auction.
Another barometer of risk appetite, the Greek 10-year yield GR10YT=RR also hit a record low, at 1.63%, down 9 bps on the day. News on Monday that Greece will fully lift capital controls has also boosted sentiment towards Greek bonds.
Good news also came from latest euro zone economic sentiment data, which showed a slight improvement for August, boosted by optimism in the industry and retail sectors and with Spain showing the biggest increase.
Safe-havens bond yields ticked up slightly on Thursday, with Germany's 10-year yields rising 2 basis points to -0.70%. French FR10YT=RR and Belgian BE10YT=RR bond yields were also up.
Still, heightened prospects of no-deal Brexit, a worsening U.S.-China trade conflict and fears of a global recession mean bond yields across the bloc remain near recent lows.
Some analysts said that should the global backdrop remain risk-averse and European bonds well bid, the Italian rally had further to run, because investors would welcome a more stable governing coalition in Rome.
German state-level inflation data, which is used to calculate a preliminary inflation figure for Germany, came in below expectations. The pan-German consumer price data is due to be published later in the day.
"We will probably see decreasing dynamism in German consumer prices. The trade conflict could escalate further. In this environment, everything yielding something positive is attractive for investors," said Norbert Wuthe, a strategist at Bayerische Landesbank.
Italy's 50-year bond yieldhttps://tmsnrt.rs/2zuPyZK
(Reporting by Tommy Wilkes and Yoruk Bahceli; Editing by Larry King, Kirsten Donovan)
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