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LONDON: Italy's bond yields slid to fresh lows on Wednesday, after members of the anti-establishment 5-Star Movement overwhelmingly backed a proposed coalition with the centre-left Democratic Party -- paving the way for a new government to take office.

The results of the online ballot of 5-Star members, released late on Tuesday, showed 79.3% of members were in favour of joining forces with the Democratic Party.

Italy's bond market has rallied hard since 5-Star and the PD reached a coalition deal last week. Still, the online ballot results remove a final hurdle to the formation of a new government, sparking further gains in one of the remaining euro zone bond market that offers positive yields.

"For the time being the vote legitimizes the rally that we have been seeing in the Italian bond market," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

The 10-year Italian government bond yield hit a fresh record low of 0.80%, taking its falls this week to 23 basis points.

Two-year Italian yields tumbled 8 bps to their lowest level since late 2017 at -0.35%, while five-year bond yields lurched closer to 0%.

Italy's closely-watched 10-year bond yield gap over safer German Bund yields tightened to around 148 bps -- its narrowest in more than a year and nine bps tighter from late Tuesday levels.

Analysts at Mizuho said this gap or spread could now tighten to 130 bps.

Italian bonds have also been supported by heightened speculation that the European Central Bank will this month cut interest rates and possibly restart asset purchases to stimulate the euro zone economy.

Outside Italy, euro zone bond yields were broadly higher

in a reflection of stronger risk sentiment in world markets and following upbeat Chinese economic data.

A report showed growth in China's service sector accelerating in August, while Britain's pound halted its decline on hopes a no-deal Brexit may yet be averted.

Germany is expected to sell three billion euros of five-year bonds later in the day.

Copyright Reuters, 2019