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UPDATE 2-Italian bond yields hit 1-month low as Draghi inches closer

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds political developments, update prices)

MILAN, Feb 9 (Reuters) - Italy’s borrowing costs hit one-month lows on Tuesday as Mario Draghi made progress in his attempt to form a government after consultations with political parties to muster a majority in both houses of parliament.

Former Prime Minister Silvio Berlusconi confirmed his centre-right Forza Italia party would support a government led by the former European Central Bank chief, who has also received the backing of the centre-left Democratic Party and the centrist Italia Viva.

Italy’s 10-year bond yield was almost one bp lower at 0.508% , hovering around one-month lows. Its spread over benchmark 10-year Bund yields was around 94.5 bps, close to its tightest levels in five years

“Bond markets are clearly indicating a lower perceived risk premium in Italy, which is good news for the broader European story,” said Andrew Sheets, head of cross-asset strategy at Morgan Stanley.

Italian debt may have also been helped by general positive market sentiment.

Meanwhile, yields on high-grade euro zone government bonds ticked lower after European Central Bank chief Christine Lagarde said late on Monday the bank will keep copious stimulus in place to revive a recession-hit economy.

Her comments, sounding more “dovish” to investors compared with her Sunday remarks, helped put downward pressure on core euro zone bond yields in Tuesday trading, according to Althea Spinozzi, fixed income strategist at Saxo Bank.

“Lagarde on Monday was more ‘dovish’ than she was on Sunday and that had a downward impact on euro zone sovereign bond yields this morning,” Spinozzi said.

Germany’s 10-year bond yield was half a bp down on the day at -0.448%, after hitting five-month highs on Monday at -0.412%. The 30-year bond yield was trading in positive territory at 0.016%, ticking down about half a bp on the day.

Underlining strong demand for long-dated bond issuance in a low-rate environment, Spain launched a new 50-year bond with initial demand over 37 billion euros ($44.72 billion).

Germany sold 1.111 billion euros of a new inflation-linked bond due in 2033.

German exports rose in December as solid trade with China and the United States helped Europe’s largest economy.

“The longer-term outlook, however, remains mixed, illustrating that the sector will still take some time before returning to full strength,” ING wrote in a note.

Reporting by Sara Rossi, additional reporting by Julien Ponthus; editing by Larry King, Ed Osmond and Giles Elgood

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