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Italian bond yields hit one-month low ahead of Fed meeting

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* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites top to reflect further drop in yields, adds German auction result)

LONDON, Sept 16 (Reuters) - Italy’s 10-year borrowing costs hit their lowest level since late August ahead of a U.S. Federal Reserve meeting at which the world’s most influential policymakers are expected to remain cautious on the economy before the U.S. presidential election.

The Federal Reserve is expected to wrap up its latest policy meeting on Wednesday with somewhat rosier economic forecasts but a renewed pledge to keep interest rates low for as long as the economy needs to recover from its deepest downturn in decades.

This should keep downward pressure on global government bond yields and risk appetite high as the world’s largest central bank keeps the stimulus taps on, though a further rally is unlikely, analysts said.

“The street has priced out rate hikes to 2025, and when coupled with the fact the Fed has already ruled out the possibility of negative interest rates, it will be difficult, if not next to impossible, for the FOMC to over-deliver on the dovish side tonight,” said Stephen Innes, a strategist at AxiCorp.

That said, euro zone bond yields dipped slightly across the board, with Germany’s 10-year government bond yield, the benchmark for the bloc, dropping a basis point to -0.49%.

Further down the ratings spectrum, Italian borrowing costs were lower by between 2 and 3 basis points, with the benchmark 10-year yields dropping to 0.97%, its lowest since late August.

U.S. Treasury yields were also slightly lower on the day, with 10-year borrowing costs edging down to 0.667%.

Analysts will also be watching for any further detail on the central bank’s shift to a more flexible position on inflation.

Charalambos Pissouros, an analyst at JFD Group, said updated economic projections will give the market an idea of how much of an inflation overshoot the Fed is willing to tolerate before they start considering raising rates.

In Europe, Germany sold 1.5 billion euros of 30-year Bunds in an auction at a time when demand for government debt remains powerful, fuelled by European Central Bank stimulus.

The president of the European Commission, the European Union executive, said on Wednesday the bloc should commit to deeper emissions cuts over the next decade, and pledged to use green bonds to finance its climate goals. (Reporting by Abhinav Ramnarayan, Editing by William Maclean)

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