UPDATE 2-Reflation bets boost German Bund yields, Italy yields ease

* Euro zone periphery govt bond yields (Adds quote, context, updates prices)

MILAN, Feb 8 (Reuters) - Germany’s 10-year bond yields touched five-month highs on Monday, boosted by the upbeat tone on world markets, while Italian borrowing costs hovered near one-month lows thanks to brighter prospects for a future government led by Mario Draghi.

German and other core euro zone bond yields tracked moves in U.S. sovereign borrowing costs as hopes grew that a $1.9 trillion aid package would be passed as early as this month, boosting growth and inflation. Ten-year Treasury yields hit 11-month highs.

Germany’s 10-year bond yield touched its highest level since early September at -0.412% before easing to -0.429% -- up 1.5 bps on the day.

Bonds sold off as world shares set another record high and oil surpassed $60 a barrel for the first time in a year.

Inflation expectations in the euro area were on the rise too, with the five-year, five-year breakeven forward at just above 1.3859%, its highest level since early May 2019. That’s still well below the ECB target of around 2%.

Italy remained in focus in the euro area. While Draghi’s route to power is still unclear, signs of support for the previous head of the European Central Bank from some of Italy’s biggest parties underpinned Italy’s bonds.

The 10-year yield was slightly down at 0.529%, not far from the almost one-month lows hit on Friday.

The gap over 10-year Bund yields was quoted around 95 bps -- close to its tightest levels in five years, while the spread over the Spanish equivalent was at around 37 bps, not far from the lowest level since mid-December 2017.

The strong performance of Italian bonds in the past week could encourage the Treasury to launch new syndicated debt deals in the near future, UniCredit analysts said.

“We continue to expect a deal in the 30-year area, with the Treasury either issuing a new benchmark or reopening BTP 1.7% Sep 51 via syndication. As an alternative, Italy might also consider to issue a new 50-year BTP,” the bank told clients.

ING predicted more countries, including Italy, could tap syndicated sovereign bond markets in coming days.

Spain mandated banks for a new 50-year bond to be issued in the near future.

ECB President Christine Lagarde is due to speak shortly before the European Parliament.

Reporting by Dhara Ranasinghe, Sara Rossi; Editing by Susan Fenton, Hugh Lawson and Gareth Jones