* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, June 24 (Reuters) - Italy's government borrowing costs fell on Monday, following a report that the European Commission will hold off on disciplinary action over Rome's budget stance this week.
Bond yields across the bloc drifted down but the moves were tepid compared to some of the sizeable falls in recent weeks on heightened speculation that major central banks, including the European Central Bank, are gearing up for rate cuts.
Italy's bond market outperformed its peers, with yields across the curve around 5 basis points lower on the day. .
According to a report in the Financial Times, the Commission will hold off from taking action over Italy's rising debt levels, allowing more time for a compromise to be reached.
Italy's Deputy Prime Minister Matteo Salvini last week raised the stakes in the budget tussle with Brussels by threatening to resign and bring down the government unless he was able to push through at least 10 billion euros ($11 billion) of tax cuts.
"The fact that Salvini is willing to push ahead with tax cuts and there is turbulence in the coalition is not good news for Italy," said DZ Bank rates strategist Daniel Lenz.
"But the market is reacting more to the FT article today."
Italy's 10-year bond yield was down 5 bps at 2.11% , close to more than one-year lows hit last week.
That pushed the gap over safer German Bund yields to 240 bps , down from 243 bps on Friday.
Analysts said there were other reasons for the solid performance of Italian bonds.
For starters they offer some of the highest yields among major government bond markets. Expectations for ECB monetary easing soon are high, overshadowing Italy's domestic risks for now.
Expectations for an increase in fiscal spending across the bloc to support economic growth in the face of a global trade war also mean a budget compromise between Italy and the EU is likely.
Outside Italy, most 10-year bond yields were down 2-3 bps on the day, with markets again bolstered by expectations for monetary easing and as political risks supported demand for Bunds and other safe havens.
Germany's benchmark 10-year yield was down 2 bps at minus 0.30%, edging back towards record lows hit last week at around minus 0.33%. (Reporting by Dhara Ranasinghe; editing by John Stonestreet)