Italian bond yields edge off highs, politics in focus

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

By Dhara Ranasinghe

LONDON, Jan 25 (Reuters) - Euro zone bond yields were little changed on Monday and Italy's borrowing costs edged off two-and-a-half-month highs as investors continued to weigh political developments in one the bloc's biggest economies.

Italian Prime Minister Giuseppe Conte is close to resigning, but hopes then to form a new government that can count on a broader majority, local media reported on Monday.

According to La Repubblica, Conte could hand in his resignation to the head of state as early as Tuesday and then form a fresh coalition that would draw on centrist and "responsible" members of parliament.

Italian bonds came under renewed pressure on Friday as main ruling parties flagged snap elections as the only way out of a political impasse.

Markets were calmer in early Monday trade. Yields slipped 1 to 2 basis points lower after touching two-and-a-half-month highs.

Italy's 10-year bond yield was last trading at 0.69% , still about 10 bps higher than where it stood a week ago.

Analysts at UniCredit said the selloff in Italian bonds most likely reflects profit-taking after the recent strong performance of the debt market and higher uncertainty ahead.

"Our baseline scenario remains that there will be no early elections," they said in a note.

Broader euro zone markets were largely subdued, with Germany's 10-year bond yield steady at -0.51%.

European Central Bank President Christine Lagarde speaks later this session, while the German Ifo business sentiment indicator due out later could flag a difficult start to the year for the euro zone economy.

"2021 feels like a continuation of 2020, so the themes are the same. Last year was about Covid, on the negative side and 2021 seems like that again but more about the exit," said David Arnaud, a senior fund manager at Canada Life Asset Management.

"Short-term, we are in an environment where rates are range bound. In the long-term, the reflation trade is very much valid and the U.S. Treasury market is likely to drive that," he added. (Reporting by Dhara Ranasinghe, editing by Larry KingS)