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UPDATE 1-Italian yields jump as surprise 20-year bond sale shakes up market

Abhinav Ramnarayan

* Italian yields rise, strong demand for 20-yr issue

* Deal comes as EU discusses disciplinary action on Rome

* Spain gets 20 blns euros of interest for 10-yr

* German yields dip as U.S.-China trade tensions persist

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds updates on Spanish and Italian bond sales)

LONDON, June 12 (Reuters) - Long-dated Italian government bond yields rose 7-9 basis points on Wednesday after the country's debt office launched a surprise 20-year bond sale, looking to take advantage of hefty demand for euro zone debt.

By mid-morning on Wednesday, lead managers had already gathered over 16 billion euros ($18.12 billion) of interest for the deal, allowing them to trim pricing guidance.

Demand for the sale was strong even though the European Union is expected to take disciplinary action against Rome over the country's growing debt.

"Right now, the carry and the ECB monetary easing is cancelling out the negative headlines," said DZ Bank strategist Daniel Lenz. The term "carry" refers to a trade where investors take advantage of low short-dated borrowing costs to pick up some yield by buying longer-dated debt.

Italy's 10-year government bond yield was up 6.6 basis points at 2.375%, while longer-dated 20- and 30-year yields were up nearly 9 basis points each.

Yields usually rise ahead of a sale, with investors selling outstanding debt to make space for the new supply.

But the move comes after a strong rally in recent days, which saw Italy's 10-year yield drop 30 bps in the first week of June, touching a one-year low of 2.28% in the process.

Spain also hit bond markets on Wednesday, and recorded over 31 billion euros of demand for 10-year debt even though the country's debt is trading at record low yields.

The country was set to price a 6 billion euro bond issue at 33 basis points over mid-swaps, according to a lead manager, a level that suggests a final yield of just above 0.60% according to Reuters calculations.

Lenz of DZ Bank said the carry was the predominant factor driving demand for Spanish bonds. "Spanish yields have hit record lows, but there is still a positive carry and it does not include the risk you have on Italy," he said.

Spain usually launches a 10-year bond sale around this time of the year, so the market reaction was muted, with the country's benchmark 10-year yield unchanged at 0.58%.

Elsewhere, German 10-year bond yields, the benchmark for the bloc, dropped to minus 0.24%, close to record lows hit last week, as concerns about the global economy grow in the shadow of a trade dispute between its two largest economies.

U.S. President Donald Trump on Tuesday defended the use of tariffs as part of his trade strategy while China vowed a tough response if the United States insists on escalating trade tensions amid ongoing negotiations.

ECB chief Mario Draghi said on Wednesday that Central European economies may be more vulnerable to a global trade war given their high reliance on foreign trade and particular focus on single industries, such as car manufacturing. ($1 = 0.8831 euros)

(Reporting by Abhinav Ramnarayan; Editing by Catherine Evans and Jane Merriman)