EURO GOVT-Italian debt leads periphery up after presidential deal
* President's re-election could end Italian political impasse
* Italian debt gains, drags up rest of periphery
* German Bunds dip but rate cut bets limit losses
By Emelia Sithole-Matarise
LONDON, April 22 (Reuters) - Italian bonds rallied on Monday, with more gains seen near term, while low-risk German debt fell after the re-election of Italy's president raised the prospect of an end to two months of political stalemate.
A broad agreement between traditional political groups on the left and right to re-elect Giorgio Napolitano handed the 87-year-old the leverage to pressure opposing parties in Italy to form a government or face a snap election.
Italian BTP futures were 82 ticks up at 113.84 while 10-year cash yields fell 11 basis points to 4.11 percent, around their lowest level since the end of January. Spanish and Portuguese bond yields fell in their wake.
"The near-term reaction is positive for Italy and to some extent for all peripheral markets. However, things are not settled yet and the risk of an early election favouring (ex-premier Silvio) Berlusconi has not disappeared completely," said Patrick Jacq, a strategist at BNP Paribas.
Italy has been in the grip of political uncertainty since inconclusive general elections in February. Nevertheless, the country's bonds have been resilient with investor concerns that a political crisis could re-ignite the region's debt crisis tempered by the European Central Bank's debt buying backstop and loose monetary policy by major central banks.
A hunt for higher returns spurred in recent weeks by the Bank of Japan's huge stimulus plans has also driven euro zone debt yields down.
Spanish 10-year yields were down 7 bps at 4.57 percent, with Portuguese equivalents down 12 bps at 5.98 percent, breaking below 6 percent for the first time since late January.
"We see flows coming from European domestic buying at the moment. Going to (yield) lows we reached this year will probably offer a pretext for some profit taking but the situation is still favourable to peripherals," BNP's Jacq said.
At the upper end of the credit spectrum in the euro zone debt market, German Bunds retreated but traders saw little momentum for a sharp sell-off before key manufacturing data this week expected to show growth remained anaemic in the euro zone, cementing market bets of a cut in official interest rates.
The Bund future was 17 ticks down at 145.86 with German 10-year yields up 1.4 bps at 1.27 percent.
"I don't think that (Italy) should be too much of a negative for Bunds given the economic outlook. It's a big week for data with PMIs and that should cement rate cut hopes." a trader said.
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