Euro zone bond yields lower, Italy remains in focus

LONDON (Reuters) - Euro zone government bond yields edged down on Tuesday, as bond markets took comfort from a pullback in lofty gas prices while keeping one eye on how political turmoil in Italy unfolds.

And with the European Central Bank expected to lift interest rates for the first time since 2011 when it meets on Thursday and unveil details of a new tool to contain stress in bond markets, investors appeared reluctant to push yields too far in one direction or another.

Germany's benchmark 10-year Bund yield is down almost 20 basis points (bps) so far this month, setting it up to break a seven-month rising streak.

(Graphic: German Bund yields set to break 7-month streak of rises, https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgyjwdpb/Bund1907.png)

Concern about European gas supplies has stoked recession fears, and as it replaced inflation at the top of investors' worry list bond yields have pulled back from multi-year highs.

News on Monday that Gazprom has invoked force majeure on some gas supplies has raised fears that Russia will keep the Nord Stream 1 pipeline closed beyond July 21, when the annual maintenance period ends.

Still, European gas prices on Monday fell to their lowest in over a week with analysts saying a significant degree of bad news is now priced in by markets.

German Bund yields were down 2.5 bps in early trade at 1.19. Italian borrowing costs were also lower, with 10-year bond yields down 3 bps at 3.34%.

Fresh political upheaval in Italy has weighed on Italian bonds, but with no fresh news to drive markets, a modest recovery appeared to be taking hold.

"For gas and BTPs alike, the absence of a further escalation seems sufficient for a recovery," said Michael Leister, head of interest rate strategy at Commerzbank.

In Italy, Prime Minister Mario Draghi is expected to address parliament on Wednesday. Draghi tendered his resignation last week after the populist 5-Star Movement refused to back the government in a confidence vote at the Senate.

That resignation was rejected by President Sergio Mattarella and it is still unclear whether Draghi will change his mind.

(Reporting by Dhara Ranasinghe; Editing by Gareth Jones)