EURO GOVT-Italian yields edge up as deadlocked parliament meets

Fri Mar 15, 2013 4:53am EDT

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* Post-election Italian yield range may hold -analyst

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By Marius Zaharia

LONDON, March 15 (Reuters) - Italian bond yields edged up in a cautious market on Friday as the country's parliament convenes for the first time since last month's election, with parties still deadlocked over forming a government.

The Feb. 24-25 vote produced a hung parliament, with the centre-left winning control over the lower house but not of the Senate. Analysts say the leadership vacuum could derail Italy's efforts to return to growth and keep its 2 trillion euro debt pile under control.

Italian bonds have so far been largely able to weather the heightened uncertainty as investors, encouraged by the perceived safety net offered by the European Central Bank's untested bond-buying programme, have continued to chase the relatively high yields on offer.

But the political wrangling expected in coming days could unsettle some, and Italian bonds could face increased volatility in the near term. Safe-haven German Bunds may then get a boost.

"If there is no capable government any time soon ... (Italian bonds) should come under pressure again," said Viola Julien, a fixed income analyst at Helaba Landesbank Hessen-Thueringen.

Italian 10-year yields were last 3 basis points higher on the day at 4.67 percent. Julien said the post-election range of roughly 4.6-4.9 percent should hold in the near term.

Bond yields of euro zone periphery peer Portugal were slightly lower across the curve on Thursday, with 10-year bonds returning 5.97 percent and two-year debt offering 3.28 percent.

Portugal will announce on Friday the outcome of its lenders' seventh review of its bailout programme. The European Commission has already said it plans to give Lisbon an extra year to meet its budget deficit goals.

After fellow bailout recipient Ireland's successful 10-year bond issue earlier this week, investors are increasingly betting Portugal will soon take steps towards coming back to the market as well.

"We like playing the convergence via 2-3 year switches out of Italy and Spain into Portugal," Commerzbank strategists said in a note.

Bund futures were 3 ticks higher on the day at 143.17, while cash 10-year German yields were steady at 1.47 percent.

Traders said U.S. manufacturing data later in the day could be key for the near-term trend for Bunds after a tight trading range in the past couple of sessions.

"The market is positioned for a strong (number), but there is potential for disappointment and that could support Bunds," the trader said.

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