UPDATE 2-Italy's long-dated yields spike as new 30-year issue flies

Long-dated Italian government bond yields rose to three-week highs as investors made space for a new 30-year syndicated debt issue, which had garnered a hefty 33 billion euros of orders in the final stages of marketing. As of the treasury's final update, the new 30-year debt launched on Wednesday had received close to the highest demand ever for an Italian syndicated bond.

This is encouraging given that the Italian economy has slipped into recession and there are signs of strains within the ruling coalition. With the broader euro zone economy also looking weak and European Central Bank policy likely to remain loose for the foreseeable future, analysts said buying the new issue was a no brainer.

"Because the Italian recession is coinciding with broader weakness in the euro area, we are very constructive on the long end of the Italian curve - it is the safe haven in the Italian bond market," said Mizuho's head of rates Peter Chatwell. "We are in an environment where the ECB either hikes rates - which would flatten the curve - or keeps rates as they are for the foreseeable future - in which case the long end really rallies."

The yield on Italy's outstanding 30-year bonds hit a three-week high of 3.71 percent, up five basis points on the day. Yields often rise ahead of a bond sale as investors make space for the new supply. Other Italian bond yields also rose 1-2 bps to their highest levels in about three weeks.

Many euro zone countries have received record demand for bond sales this year so far. Finland became the latest seller to generate record levels of demand for a new 10-year issue on Tuesday, providing further proof of the popularity of safe haven euro zone debt against a backdrop of weakening global growth.

Other euro zone government bond yields hovered near recent lows on the day after German industry orders were unexpectedly low, a further sign that factories in Europe's largest economy are shifting into lower gear due to a slowing world economy. "This will raise some expectations that the ECB will be adding liquidity to the market through LTROs or even maybe a resumption of asset purchases," said Chatwell. LTROs refer to a programme of cheap loans to banks designed to improve liquidity.

"It's supportive of European government bonds and also of the rally in credit markets." Germany's 10-year government bond yield was unchanged at 0.165 percent, not too far from a one-month low of 0.147 percent hit at the start of February. (Reporting by Abhinav Ramnarayan; Editing by Saikat Chatterjee, Hugh Lawson and Peter Graff)