UPDATE 1-Italian bond yields extend last week's rise on budget concerns

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By Virginia Furness

LONDON, Oct. 1 (Reuters) – Italian bond yields rose sharply on Monday, extending the trend of last week, while a report suggested that an Italian draft budget was to be rejected by the European Commission .

Italian daily La Repubblica said on Monday that the Commission was preparing to reject Italian budget plans in November and open a case against its public accounts in February.

The yield on two-year Italian government bonds jumped 18 basis points to 1.23%, before falling back to 1.19%, while that of its longer-term 10-year bonds was up nine basis points to 3.24%.

Demand from leading investors to hold Italian debt on the top-rated German bonds was 274 basis points on Monday, after being as low as 225 basis points last week.

"It's hard to think of spreads that will fall into the low end in the coming months," ING analysts wrote in a note published on Monday.

The report comes after a busy week for investors in Italian debt.

Italian government bond yields and bank stocks were hit hard on Friday after Italian ruling parties – the 5-star Anti-Settlement Movement and the right-wing League – proposed a budget for 2019 with a goal in mind. budget deficit of 2.4% of gross domestic product.

"It is clear that the European Commission will not appreciate (the budget proposal)," said Michael Leister, Commerzbank's interest rate strategist.

"Brussels will give its opinion which, in our opinion, will not be positive and … the rating agencies will opt for a similar position. Decommissioning is our basic case. "

Tria has been trying to calm fears that Italy's huge debt – 131 percent of GDP – would continue to grow, saying Sunday's investments would fuel economic growth over the next two years and put the debt at risk. drop.

Meanwhile, eurozone bond yields rose by one to two basis points, as an agreement reached last Sunday between the United States and Canada to save the North American Free Trade Agreement (NAFTA). pushed investors towards riskier assets. (Report by Virginia Furness, additional report by Steve Scherer in Rome, edited by Saikat Chatterjee and Robin Pomeroy)