EURO GOVT-Italian yields jump after Monti says resigning early

Mon Dec 10, 2012 4:36am EST

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* Italian borrowing costs rise as Monti says quitting early
    * Move casts uncertainty over country's political future
    * Market positioning increases the risk of sell-off
    * Spanish yields also rise, Bunds benefit


    By Ana Nicolaci da Costa
    LONDON, Dec 10 (Reuters) - Italian government bond yields
jumped on Monday as Prime Minister Mario Monti's decision to
resign early left the country's political future unclear,
hurting riskier euro zone debt.
    Monti said on Saturday he would resign once the budget for
2013 was approved, raising questions over who will take the
reins of the euro zone's third largest economy at a time when it
remains a focus of the region's three-year debt crisis.
  
    The announcement, which will potentially bring forward an
election due early next year, came after former prime minister
Silvio Berlusconi's party withdrew its support for the
government and he said he would run to become premier for a
fifth time. 
    "Berlusconi's actions have created a degree of uncertainty
in the market with regards to the Italian political scene,"
Justin Knight, European rates strategist at UBS said.
    "Part of the problem here is that investors outside of Italy
are not positioned very well for this," he said. "They're quite
close to neutral versus benchmarks, having previously been
underweight of both Spain and Italy. Some investors are now
overweight, and we have seen more investors going overweight
over the last few weeks." 
    Top-ranking German bonds benefited from the uncertainty.
Bund futures were 28 ticks higher at 146, pushing
10-year yields 2.3 bps lower to 1.27 percent.   
    Ten-year Italian borrowing costs, meanwhile,
jumped 25 basis points to 4.80 percent, while the Spanish
equivalent was 14 bps higher at 5.62 percent.
    Spanish Economy Minister Luis de Guindos said on Monday his
country would suffer contagion from Italy's political turmoil
and Madrid continued to study the need for outside assistance.
 
   Five-year credit default swaps (CDS) on Italian government
debt rose 33 bps to 288 bps, according to data monitor Markit.
This means it costs $288,000 annually to buy $10 million of
protection against an Italian default using a five-year CDS
contract. 
    "Any question over their dedication to austerity is not
going to be good for BTPs (Italian debt) especially given the
fact that everyone is long," said one trader in reference to the
recent bout of buying based on the prospect of European Central
Bank support.
    
    HIGHER BORROWING COSTS
    Alessandro Giansanti, senior rate strategist at ING, said
Monti's move could see 10-year Italian borrowing costs rise to
5.25 percent over the next two weeks as it will complicate the
parliament's passage of measures aimed at keeping the country's
debt in check.
    The ECB's promise to buy bonds of countries that ask for
help first has seen Italian borrowing costs fall some 200 basis
points since July's high of 6.7 percent - a level viewed as
unsustainable for long-term funding.
    "The main risk is that the measures that the current
government will need to pass come at risk," Giansanti said. 
    The sell-off could be accentuated by the extent of the
recent bond rally and as liquidity thins into the end of the
year, he added.
    As riskier debt came under selling pressure, bonds issued by
other higher-rated countries also benefited.
    Yields on 10-year French debt shed 2.2 bps to
1.94 percent and the Dutch equivalent fell 2.5 bps
to 1.50 percent.
    Even during the recent peripheral rally, safe haven bonds
have enjoyed underlying support from investors worried about an
impasse in ongoing U.S. budget talks. 
    The White House and Republicans are trying to reach an
agreement that would stop automatic spending cuts and tax
increases from going into effect at the beginning of the year -
a "fiscal cliff" that many worry could tip the U.S. economy back
into recession, if it kicks in.
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