* Italian officials agree budget outline, easing election fears
* Italian 2-yr bonds outperform, yields down 8 bps at 0.95 pct
* Analyst says investors can't ignore yield, despite risks
* German industrial orders plunge, capping rise in yields
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Aug 6 (Reuters) - Italian two-year borrowing costs dropped below the one percent mark on Monday, as last week's announcement on a 2019 budget framework persuaded investors back to the only short-dated euro zone securities offering relatively high yields.
Italian Prime Minister Giuseppe Conte said on Friday the government had fixed the framework of its 2019 budget, soothing nerves over tensions within the Italian government and over the future of pro-European Economy Minister Giovanni Tria.
Having ballooned out to as much as 1.36 percent ahead of Friday's budget meeting, Italian two-year yields dropped towards the end of the session, and fell another eight basis points on Monday to 0.95 percent.
That has pushed spreads against five-year Italian bond yields to around 110 basis points, the widest since March 2017.
Many investors had no choice but to buy Italian two-year debt despite risks, ING rates strategist Martin van Vliet said, noting that some of his clients such as pension funds were under pressure to outperform government bond indices.
"After May, the Italian two-year has become very attractive in terms of yield and many real money accounts who would find it difficult to explain to clients that they are buying longer-dated Italian debt are buying this instead," van Vliet said.
On May 29, Italian two-year debt had its biggest daily spike in over 25 years on worries the country would quit the euro zone and default on its debt.
In a fresh reminder of political risks, Deputy Prime Minister Luigi Di Maio said respecting fiscal rules was not the priority in the next budget.
Also, Italy's third-largest bank Banco BPM shares fell 7.6 percent after the Italian lender said earnings missed forecasts due to higher than expected loan loss provisions.
However, in contrast to Italian two-year yields at 0.95 percent, Spanish two-year debt yields minus 0.30 percent and the German equivalent is at minus 0.59 percent. .
Other Italian bond yields also slipped, though not as much. The yield on five-year BTPs was down 4 bps at 2.08 percent and 10-year borrowing costs were down 2 bps at 2.92 percent.
The closely-watched 10-year spread over Germany was at 250 bps, roughly in the middle of the extremely wide 210-285 bps trading range since the end of May.
Most other euro zone bond yields were a touch higher on the day, having dropped sharply towards the tail end of last week not only on Italian politics, but also on global trade worries and the effect they may have on the euro zone economy.
German industrial orders plunged by more than expected in June, posting the steepest monthly drop in nearly a year and a half, suggesting that factories in Europe's largest economy could shift into a lower gear in the coming months.
German 10-year yields edged higher on the day but were still 8 bps below last week's high at 0.415 percent.
Reporting by Abhinav Ramnarayan, Editing by William Maclean