EURO GOVT-Italy bonds firm but recovery shaky as politics weigh
* Bargain-hunting after selloff helps Italy bonds recover
* Market seen volatile on Italy political deadlock
* Safe-haven German Bunds slip
By Emelia Sithole-Matarise
LONDON, March 5 (Reuters) - Italian bonds recovered on Tuesday as some yield-hungry investors picked up the cheapened debt with the European Central Bank's bond-buying backstop offsetting concerns over possible new elections in the country.
Centre-left leader Pier Luigi Bersani, who won a lower house majority for his grouping in Italy's elections but could not win the Senate, issued an ultimatum to anti-establishment leader Beppe Grillo to support a new government or return to the polls.
Political uncertainty has hit Italian bonds but the ECB's yet-to-be tested bond-buying backstop has prevented a deeper sell-off.
Trade was expected to be volatile before an ECB policy meeting on Thursday where President Mario Draghi is expected be questioned on how the ECB scheme could be activated if Italy does not have the reform-committed government required by the central bank's support scheme.
"We're seeing quite a deal of volatility and some buyers coming in after the selloff and consolidation of the past days," said Michael Leister, a senior rate strategist at Commerzbank.
"The market is hoping for some comment or some reassurance that the ECB is ready to act, however at this point with the political situation in Rome not clear we don't think Draghi will deliver on these hopes."
Italian 10-year yields were last 12 basis points down on the day at 4.74 percent.
They slightly outperformed Spanish bonds but this was expected to be temporary. Italian assets were seen coming under renewed selling pressure as long as the government situation remained unresolved.
NO QUICK SOLUTION
"The trend for me is for wider spreads because the political situation will not be solved quickly so there will be some more volatility in the next few weeks," said Alessandro Giansanti, a strategist at ING.
"We can go in 10-year (Italian) yields to 5.0-5.10 percet but I don't think we will go back to (2012 highs above 6 percent) because of the ECB backstop."
In core euro zone markets, German Bunds dipped as the tentative recovery in the periphery prompted some investors to book profits after their climb to 2013 highs on Monday.
Traders said a deeper selloff in low-risk Bunds was unlikely given concerns over Italy and expectations of a dovish stance from the ECB on Thursday which could cement speculation of a rate cut later in the year.
"(Italian debt) is stabilised for now and we are waiting to see whether they can cobble together any form of government but it can spiral so I don't see why Bunds should sell off," a trader said.
Bund futures were last 36 ticks down on the day at 145.15 while German 10-year yields were 3 bps up at 1.45 percent.
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