UPDATE 1-year fixed-rate euro bonds in solid Italian and Spanish business surveys

* Italian and Spanish PMIs show strong business sentiment

* 10-year Italian yields rise 3 bp, close to minimums

* Draghi speaks, investors expect comments on policy

* Slovakia is the last attempt at a 50-year bond

* yield on public debt in the periphery of the euro zone tmsnrt.rs/2ii2Bqr (Deeds)

By Abhinav Ramnarayan

LONDON, June 5 (Reuters) – Italy's borrowing costs rose on Tuesday from its bi-weekly lows but euro zone bond markets remained stable after encouraging business surveys in Italy and Spain.

Spain's service sector grew at its fastest pace in three months and Italy's service growth accelerated in May after a recent slowdown trend, polls showed on Tuesday.

This provided some relief to the markets still affected by the volatility of last week. when political concerns drove one of the biggest sales of Italian public debt since the Eurozone debt crisis of 2010-2012.

Some badysts had worried that the establishment of the first anti-establishment government in Western Europe, formed by a coalition of 5-star parties and the Italian League, could affect business sentiment and cause more sales.

But Investec economist Philip Shaw said the causal links were not always so clear.

"Market movements are not always equal to movements in the economy, so it is perfectly feasible for economic data to be decoupled from financial markets," he said.

It was too early to measure the impact of the planned policies of the new government, he added.

"If the tax cuts and the additional spending plans will overcome the negative aspects of the effect on public finances and the confrontational stance with the EU, I would be cautious to say that," he said.

Yields on Italian government bonds were higher on the day, with 10-year yields increasing 2.5 basis points to 2.58 percent, but were still close to bi-weekly lows reached on Monday and well below from the maximum of 3,388 percent last week.

The bond yield differential between Italy and Germany was 217 bps, last week it had extended beyond 300 bps.

Most other yields on euro zone bonds remained stable on the day, with German 10-year bonds, the benchmark for the region, unchanged at 0.41 percent.

The data showed on Monday that the European Central Bank had lowered its purchases of Italian government bonds last month, just when investors were unloading them for fear that a Euroskeptic government would take power in Rome.

Market participants will also be awaiting a speech by ECB President Mario Draghi on Tuesday afternoon to get an indication of how political events in southern Europe can affect monetary policy.

Spain also saw a change of government last week, with the socialist Pedro Sánchez replacing the conservative Mariano Rajoy. Investors evaluated the likelihood of another election as low, which kept volatility at bay.

S & P Global said Monday that the appointment of the new government in Spain does not have an immediate effect on the country's sovereign rating.

Elsewhere, Slovakia is preparing for a possible sale of long-term bonds, after announcing a mandate for a 10-year euro bond and potential 50-year bonds.

Report of Abhinav Ramnarayan, graphic by Sujata Rao
Edition of John Stonestreet and Andrew Heavens


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