UPDATE 2-Italy bonds, bank stocks fall as EU concludes Rome broke debt rules

(Adds quotes, adds charts and updates pricing)
By Abhinav Ramnarayan, Danilo Masoni and Virginia Furness
LONDON/MILAN, June 5 (Reuters) - Italian bond yields rose
sharply and bank stocks fell on Wednesday after the European
Commission concluded that Italy is in breach of EU fiscal rules
because of its growing debt, a situation that justifies the
launch of a disciplinary procedure.
But the move higher in Italian yields was tempered by a
strong rally in core government bond yields as focus returned to
monetary policy in both the U.S. and Europe, as well as
conciliatory comments from Prime Minister Giuseppe Conte.
The yield on Italy's 10-year government bond pulled back to
2.516%, down one basis point on the day, having risen sharply to
a high of 2.631% earlier in the session.
Yields fell after Conte said the government wanted
constructive talks with Brussels to reach a deal over 2019
budget targets, after the European Commission issued a warning
over Rome's finances. European Economic Commissioner Pierre Moscovici has already
insisted that the process could be stopped if new data and
commitments from Rome emerged. But investors remain wary after the European Commission said
on Wednesday that Italy's growing debt broke EU rules, giving it
the option of opening a disciplinary procedure that could lead
to a prolonged dispute with Rome. If the European Union countries back this assessment in the
next two weeks, the EU executive could subsequently recommend to
start the procedure, a move expected before a meeting of EU
finance ministers in early July.
Italian bank shares had also taken a hit earlier in the
session and were down as much as 2.3% on the day .FTIT8300 .
"Yes the announced EDP procedure today didn't come as a
shock but is sure to send BTP/Bund spreads wider which matters
for banks given their large sovereign bond portfolios," said
Russell Quelch, financials analyst at Redburn, in London.
"On the technicalities, the European Commission has until 1
August to give a final recommendation to the Council, for formal
action in Spring so this will likely remain an overhang for some
time."
Pictet Asset Management's chief strategist Luca Paolini said
at a briefing on Tuesday said that he does expect an agreement
between Italy and the EU to allow some more spending.
Adding to upward pressure on Italian yields, League's
economics chief said the party will insist Prime Minister
Giuseppe Conte takes a tough line in budget talks with the
European Commission and will "stop at nothing" to prevent new
belt-tightening measures. Earlier, Germany's 10-year bond yield reached a record low
on Wednesday as investors ramped up their bets on a rate cut in
the United States and a generous loan package for banks in the
euro zone. A rally in U.S. Treasuries also gathered steam after data
reported the smallest monthly gain in more than nine years in
U.S. private sector jobs. Germany's 15-year government bond yield also turned negative
for the first time. DE15YT=RR
Most major government bond yields dropped after U.S. Federal
Reserve Chair Jerome Powell said overnight the Fed would respond
"as appropriate" to the risks posed by a global trade war.
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Volatile trading session for 10-year Italy bonds after EU says
Rome broke debt rules https://tmsnrt.rs/2WLsD9K
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