EURO GOVT-Bunds at two-week high as sentiment sours
* Bunds hit two-week highs after poor corporate earnings * Italian yields rise on political uncertainty, supply * Belgium sells 3.6 bln euros of bonds to hit 2012 target By Kirsten Donovan LONDON, Oct 29 (Reuters) - Spanish and Italian bond yields rose and German Bund futures hit two-week highs on Monday, partly prompted by former Italian Prime Minister Silvio Berlusconi's threat to bring down the Rome government. A string of disappointing corporate earnings late last week also weighed on equities and spurred bids for lower-risk assets such as German Bunds. "Peripherals are under pressure so there does appear to be a euro-centric driver to the risk-off mood," said Richard McGuire, rate strategist at Rabobank. "As time passes there should be a growing move towards pricing in an uncertainty premia to the Spanish curve ... and Berlusconi's rant perhaps highlights the less-than-stable nature of Italian politics and reinjects some degree of political risk into BTPs." Berlusconi threatened on Saturday to withdraw his centre-right party's support for Mario Monti's government. ID:nL5E8LS1ZK] Italian debt may also come under more pressure before a 7 billion euro five- and 10-year bond sale on Tuesday. "We've got very reduced liquidity with the U.S. deemed to be shut for the rest of the day, so people are biding their time," one trader said. "But supply is putting a bit of pressure on non-core markets and if anyone is looking for an excuse to sell Italy, this is it ahead of the auctions, although we believe there will be support for the market (when 10-year yields reach 5 percent)." Italian 10-year bond yields were up 7.5 basis points at 4.99 percent, underperforming their Spanish counterparts where yields were 3.5 bps higher at 5.65 percent. Trading was subdued with U.S. equity markets shut and an early close recommended for fixed-income markets as Hurricane Sandy headed for the east coast, including New York. For Spain, the issue remains when it will ask for a bailout, which looks increasingly likely to be later rather than sooner. ECB policymaker Ewald Nowotny said on Sunday Spain had no immediate need of help from the central bank's new bond-buying programme as it could refinance its debt on the markets at an acceptable cost. Coupon and redemption payments this week totalling almost 25 billion euros from Spain and redemptions of 14 billion euros from Italy should help contain selling pressure. "It doesn't mean we're going to have a positive performance this week by Spain and Italy but it does limit the downside to any sell-off," McGuire said. German Bunds extended Friday's rally, begun after a raft of corporate earnings - from global giants Apple and Amazon among others - fell short of expectations. Bund futures were last 55 ticks higher at 141.40, with 10-year cash yields down 5 basis points at 1.49 percent. UBS technical analyst Richard Adcock said the jump higher in Bunds on Friday suggested the recent rally can continue in the short-term, although the tone had not yet turned positive enough to persuade the bank to put bets on that move higher. Belgium kicked-off this week's supply, selling 3.6 billion euros of bonds, including some of more than 20 years' maturity, and surpassing its 2012 issuance target. "It's a decent auction considering there is also long-end issuance from Germany and France this week," said Nomura rate strategist Artis Frankovics. "They (Belgium) have one more scheduled auction which it is quite likely they will cancel, but it is also possible they will do some front-loading for next year." Germany will sell ultra-long 2044 bonds and France debt of between 10 and more than 20 years' maturity on Wednesday, which traders said may weigh on longer-dated yields as dealers sell to make space on their books for the new paper.. "The core issuance this week is skewed to the long end," one said. "That may create some steepening pressure."
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