UPDATE 1-Italy bonds, bank stocks fall as EU concludes Rome broke debt rules

(Adds quotes, updates pricing, adds detail)
By Abhinav Ramnarayan and Danilo Masoni
LONDON/MILAN, June 5 (Reuters) - Italian bond yields rose
sharply and bank stocks fell on Wednesday after the European
Commission concluded that Italy is in breach of EU fiscal rules
because of its growing debt, a situation that justifies the
launch of a disciplinary procedure.
Italian banks .FTIT8300 were down 2.3% to a day low by
1039 GMT following the news, while the yield on 10-year
government bonds rose eight basis points to hit the day's high
at 2.60%. IT10YT=RR .
If the European Union countries back this assessment in the
next two weeks, the EU executive could subsequently recommend to
start the procedure, a move expected before a meeting of EU
finance ministers in early July.
"Although the European Commission has already suggested
deficit procedures are warranted, it is a headline that has fed
into Italian bond yields this morning. This is part of a formal
process," said Rabobank rates strategist Matt Cairns.
He said that investors also need to keep an eye out for
comments by European Economic Commissioner Pierre Moscovici, who
has recently said he prefers dialogue to sanctions.
Shortly after the comments from the EU, Moscovici said the
bloc's executive was ready to change its analysis on a possible
procedure over Italy's debt if new data and commitments from
Rome emerged. But this did little to temper the rise in Italian yields
with its spread over top-rated Germany at a day's high of 280
bps DE10IT10=RR .
"It (the EU decision) was widely expected, the reaction has
been rather contained so far," said Vincenzo Longo, financial
analyst at IG Markets, adding that he was monitoring whether the
spread would go beyond 295-300 basis points, a threshold that
has not been breached since November.
"A breach would bring back the tensions seen last autumn..
Once it tops 300 it could shoot up to dangerous levels," he
added.
Adding to upward pressure on Italian yields, League's
economics chief said the party will insist Prime Minister
Giuseppe Conte takes a tough line in budget talks with the
European Commission and will "stop at nothing" to prevent new
belt-tightening measures. Earlier, Germany's 10-year bond yield reached a record low
on Wednesday as investors ramped up their bets on a rate cut in
the United States and a generous loan package for banks in the
euro zone. Most major government bond yields dropped after U.S. Federal
Reserve Chair Jerome Powell said overnight the Fed would respond
"as appropriate" to the risks posed by a global trade war.
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EU says Italy broke fiscals rules, bond yields rise sharply https://tmsnrt.rs/2WSvVbm
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