EURO GOVT-Italian yields rise; relief at new govt fades

* Italian yields rise after auction, ECB steps in
* Yields hit euro-era high at 5-yr bond sale
* Bunds rally as crisis rages on

By Kirsten Donovan and Ana Nicolaci da Costa
LONDON, Nov 14 (Reuters) - Italian government bonds
yields rose on Monday as relief over the appointment of a new
head of government in Rome gave way to concerns over the size of
the task still facing policymakers trying to tackle the euro
zone debt crisis.
Yields at a 3 billion euro five-year Italian bond sale hit
euro-era highs of 6.29 percent, though demand was enough to see
the deal price below levels seen in the secondary market in
early trading.
The European Central Bank (ECB) stepped in to buy bonds
shortly after the auction as yields began to rise, traders said.
But Italian yields were up sharply in late trade and Spanish
yields broke above 6 percent for the first time since August.
Underpinning safe-haven Bunds, German Chancellor Angela
Merkel said Europe could be living through its toughest hour
since World War Two as a new leadership in Greece as well as
Italy rushed to form governments and limit the damage from the
crisis.
"I think the market believes that that's a step in the right
direction, but the problem is it's just one or two steps and the
journey is huge. So you are already moving on to other worries,"
John Davies, fixed income strategist at WestLB, said.
Following premier Silvio Berlusconi's resignation, Italian
President Giorgio Napolitano asked former European Commissioner
Mario Monti on Sunday to form a government to restore market
confidence.
"I think we are moving onto issues like are the problems in
Italy perhaps too big for even somebody of Mario Monti's stature
to cope with?" Davies said. "You have got all the recession
worries that are abounding."
Benchmark Italian 10-year yields were up 23
basis points at 6.73 percent in late trading, having hit a
euro-era high of 7.5 percent last week. Five-year yields
were up 14 basis points at 6.67 percent.
Italy paid a euro-era high price to sell five-year bonds on
Monday, with investors wary of buying its debt until the
country's new leadership undertakes profound economic reform.
"There was always going to be good domestic support
particularly with it being a five-year maturity. There is a lot
of natural demand from the banking sector for balance sheet
purposes," Marc Ostwald, strategist at Monument Securities said.

FATE OF EURO ZONE
Any bouts of relief from the euro zone debt crisis have
proved short-lived with efforts to construct a financial
firewall to protect Italy, Spain and potentially France
struggling to overcome legal and political obstacles.

Greece also appointed a new prime minister late last week,
former ECB vice president Lucas Papademos, easing fears the
country could drop out of the euro zone.
"In short, the market can be more confident in the ability
of Greece and Italy to pass the necessary fiscal measures to
regain control of their debt, but the economic and structural
issues facing the euro zone remain a problem," said Credit
Agricole CIB rate strategist Peter Chatwell.
With the crisis still the dominant topic, December German
Bund futures saw a settlement close of 138.26, up 100
ticks on the day. The Bund hit a record high of 139.58 last
week.
The European Central Bank halved its purchases of government
bonds last week, according to data published on Monday but the
data did not include its purchases towards the end of last week.
.
Investors will therefore keep an eye on next Monday's weekly
data to gauge the bank's commitment to its bond-purchasing
programme under its new Italian president Mario Draghi.
Analysts expect the central bank buying to continue this
week in the face of heavy supply, with Spain and France holding
auctions on Thursday.