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Calmer euro zone bond markets ready for Italy to tap 50-year bond

Dhara Ranasinghe

* Italy to sell more 50-year bonds

* Analysts say tap may come as early as Tuesday

* Broader euro zone bond markets largely steady

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

LONDON, July 9 (Reuters) - Euro zone bond yields edged higher on Tuesday, with focus turning to Italy's unexpected plans to seize on improved market confidence to tap ultra-long-dated debt.

The Italian Treasury said late on Monday that it has hired investment banks to help sell more of its 50-year bonds to institutional investors.

Analysts said that tap could come as early as Tuesday.

Fifty-year Italian bond yields were steady around 2.88% , having briefly jumped after Monday's announcement.

The backdrop for the bond sale is favorable.

Italian bond prices surged last week after the government avoided European Union disciplinary action for excessive debt.

This, combined with expectations that the European Central Bank would retain its dovish stance under incoming president Christine Lagarde, pushed Italian yields to their lowest since 2016 last week.

And with more than half the euro zone bond market offering yields in negative territory, demand for bonds with a positive yield is strong.

"Italy is taking advantage of the conciliatory tone from Brussels, although we are still skeptical about how the negotiations over the 2020 budget will go in the autumn," said DZ Bank rates strategist Christian Lenk.

"And the demand for yield is still strong, so tapping the 50-year bond gives investors duration and credit -- two things they are looking for."

Data on Monday showed Japanese investors were net sellers of French bonds in May for the second consecutive month but increased their purchases of Spanish debt.

Analysts say that trend may have accelerated given that even long-dated French government bond yields have fallen into negative territory in recent weeks.

For now, most euro zone bond yields inched higher as profit-taking on recent price gains set in as investors dialed back expectations for aggressive U.S. rate cuts this month following Friday's strong jobs data.

Closely-watched bond spreads over euro zone benchmark issuer Germany have widened slightly as a result.

For instance, the Spanish/German 10-year bond yield gap widened 10 basis points on Monday to around 80 bps -- its widest since mid-June. It held near those levels on Tuesday.

(Reporting by Dhara Ranasinghe; Editing by Catherine Evans)