German Bund yields at five-week highs as safe-haven lose their shine

LONDON: Bond yields in benchmark euro zone issuer Germany rose to their highest level in five weeks on Tuesday, as growing hopes of fiscal restraint in Italy and a Brexit deal in coming weeks eroded demand for safe-haven debt.

Italy's bond yields fell for a seventh straight session, with long-dated yields briefly hitting their lowest level since late July.

Comments from top Italian politicians in recent weeks that European Union fiscal rules will be respected in the 2019 budget talks have boosted sentiment towards Italian debt as well as broader peripheral bond markets in the bloc.

That turnaround in sentiment painted a positive backdrop for the launch of a new syndicated 15-year inflation-linked bond from Spain, expected to be priced later on Tuesday.

Italy's Economy Minister Giovanni Tria meanwhile said Italy will start to implement cuts in personal income tax next year and make it easier for people to retire but aims to maintain investor confidence.

"Primarily, what we are seeing is Italy risks being priced out," said ING senior rates strategist Benjamin Schroeder.

Italy's 10-year bond yield fell to its lowest in more than six weeks at 2.7 percent before pulling back to around 2.73 percent to trade 1 basis point lower on the day. It was set for its best run of daily falls in over a year.

Shorter-dated Italian yields were down around 5 bps  .

In contrast, Germany's Bund yield rose more than two basis points to a five-week high at 0.43 percent.

It held higher even as long-dated Italian yields pulled off their lows, suggesting other forces at play behind the sell off in top-rated German debt.

Analysts pointed to comments on Monday from EU Brexit negotiator Michel Barnier that a divorce deal with Britain could be agreed in six to eight weeks if negotiators were realistic in their demands.

That news has lifted sterling as investors unwind the risk premium associated with Brexit talks, in turn undermining safe-haven debt.

British gilt yields rose to more than one-month highs , while 10-year U.S. Treasury yields hit their highest in just over a month at around 2.96 percent.

"An easing of risks is weighing on German bonds," said KBC rates strategist Mathias van der Jeugt. "If you look at yesterday's driver, you see weakness in Bunds followed strength in Italian bonds and a second down leg in the German market followed the Barnier comments."

Analysts said Thursday's upcoming ECB meeting should temper bond market moves in general.

The ECB is expected to firm up its plans to halve monthly asset purchases to 15 billion euros ($17.4 billion) come October .