UPDATE 1-Italian bond yields dip as Mario Draghi touted for PM

* Italian yields drop 3-4 bps across the curve

* Former PM Renzi wants Draghi to head Italian govt

* Euro zone manufacturing resilient in Jan

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, context)

MILAN/LONDON, Feb 1 (Reuters) – Italian government bond yields slipped on Monday, outperforming euro zone peers, as talk of a possible premiership for ECB president Mario Draghi emerged and data pointed to resilient business activity in the euro zone last month.

Euro zone manufacturing growth remained resilient at the start of the year but the pace waned from December as renewed lockdown measures across the continent, alongside supply shortages, hurt activity.

In this context, Italian debt — which has recently taken a hit on worries over a potential new election — recovered some of its losses.

“The market is optimistic about the outcome of the government crisis in Italy and it is starting to price in the scenario of Draghi as prime minister,” said Althea Spinozzi, fixed income strategist at Saxo Bank.

“That scenario would offer a pro-European message,” she added.

Italian benchmark 10-year borrowing costs dropped 3 bps to 0.614%.

The Italy-Germany 10-year bond yield spread, seen as a gauge of risk sentiment in the single currency bloc, tightened 3 bps to 113 bps.

Prime Minister Giuseppe Conte handed in his resignation last week in a bid to form a new majority in parliament and avoid fresh elections.

The risk remains that his bid may prove unsuccessful.

A party source said on Sunday that Matteo Renzi, who triggered Italy’s political crisis this month by pulling his Italia Viva out of the ruling coalition, would like to see Draghi become prime minister.

In the meantime, Renzi said on Monday he hoped a new government would be in place by the end of the week.

Elsewhere, primary market activity is likely to remain strong this week, with Belgium mandating banks for the sale of new 50-year bond and Finland set to issue a new 30-year note.

German Bund yields, the benchmark for the euro zone, were flat at around -0.514% on Monday.

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