Respite for Italian bonds as ECB stimulus bets swell

* Italian yields drop 6 to 7 bps across the board

* Markets fully price in ECB rate cut for Thursday

* Short-dated Gilt yields drop after BoE rate cut

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, March 11 (Reuters) - Italian government bond yields fell from recent highs on Wednesday on expectations the European Central Bank will boost monetary stimulus when it meets on Thursday, to counter the impact of the coronavirus outbreak on the European economy.

Following a 50-basis-point rate cut from the Bank of England on Wednesday morning, expectations are the ECB will also act, probably with a 10-basis-point cut.

Money market pricing on Wednesday showed that a 10 basis point rate cut is now being fully priced in by investors. . Italian government debt is seen as the biggest beneficiary.

"We expect new TLTROs to be issued to make sure there is enough liquidity," said DZ Bank strategist Daniel Lenz, referring to cheap loans the ECB gives banks to boost the economy, known as targeted long-term refinancing operations.

"There is also a reasonable chance of a rate cut. It would be quite obvious to do it, because (ECB chief Christine) Lagarde has said before that tiering has increased cross-border activity among banks in the euro zone, and they need to maintain that."

Italian government bond yields were down 6 to 7 basis points across the board, coming off recent highs. The benchmark 10-year government bond yield was lower 7 basis points at 1.31%, further off Tuesday's two-month high of 1.458%. The spread over Germany tightened to 205 bps from Tuesday's 227 bps.

Germany's two-year bond yield, meanwhile, dropped a basis point to -0.964%, tracking short-dated Gilt yields lower following the emergency base cut from the Bank of England.

Benchmark 10-year German debt, on the other hand, rose about three basis points to -0.77%, as the bearish sentiment eased a touch. Most other high-grade euro zone government bond yields were also higher on the day., (Reporting by Abhinav Ramnarayan, editing by Larry King)