By Emelia Sithole-Matarise
LONDON Fri Nov 22, 2013 3:44am EST
LONDON Nov 22 (Reuters) - Italian bonds edged higher on Friday helped by the prospect of reduced sales of new debt by the government in the remainder of this year and comments from European Central Bank officials affirming the bank's ultra-easy monetary policy.
Demand for lower-rated euro zone bonds was helped by U.S. Federal Reserve official James Bullard, who judged Thursday's inflation data gave the central bank some leeway to stick with its accommodative policy.
Italian bonds, however, outperformed safe-haven German Bunds where gains were held back by wariness before German IFO business morale index due at 0900 GMT.
Reduced funding needs for the rest of the year prompted the Italian Treasury on Thursday to cancel two scheduled bond auctions in the next few weeks.
Italian 10-year yields were last down 1.4 basis points at 4.08 percent with Spanish equivalents 1 basis point lower at 4.11 percent.
"We continue to like periphery and semi-core given the amount of auctions getting canceled. That supports the grind lower in yields and bigger picture the ECB tone is pretty supportive," a trader said.
Although President Mario Draghi sought on Thursday to play down a media report that the central bank was actively considering cutting its deposit rate below zero, some officials in the ECB consider such a move the logical next step if deflation threatens the euro zone.
Vice-President Vitor Constancio said earlier this week the bank was open to fresh measures to support the economy after it cut its main refinancing rate two weeks ago,
German Bund futures were last 10 ticks lower at 140.88 with German 10-year yields 1 bps higher at 1.76 percent ahead of sentiment data expected to reinforce the picture of a recovery in the euro zone's biggest economy. The Ifo is expected to rise to 107.7 points after a fall in the previous month.
"There's a risk towards a stronger IFO outcome which is negative for Bunds but given the current constellation of a supportive ECB don't think it will be a significant move," said Mathias van der Jeugt, a strategist at KBC in Brussels.
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