EURO GOVT-Italian debt rises on prospect of end to deadlock

Wed Apr 24, 2013 3:37am EDT

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By Marius Zaharia

LONDON, April 24 (Reuters) - Italian 10-year bond yields fell on Wednesday and were expected to fall further with the country's president set to nominate a new prime minister to end the deadlock created by February's inconclusive election.

The new coalition, which could take office in days, would be backed primarily by the centre-left and centre-right, the parties that have so far refused to cut a deal.

While the move eases near-term political uncertainty in Italy, concerns remain that future potential clashes between the centre-left and the centre-right may hinder any reform efforts aimed at boosting growth and cutting debt.

"It's not an ideal scenario, but after two months of political deadlock, markets will see this as a step forward," said Alan McQuaid, chief economist at Merrion Stockbrokers in Dublin.

"Ultimately it could mean two steps back."

Italian 10-year yields were 6 basis points lower on the day at 3.92 percent, holding near 2-1/2 year lows of 3.89 percent hit on Tuesday. McQuaid said they could revisit 2010 lows around 3.75 percent in the near term.

Equivalent Spanish yields were down 4 bps at 4.27 percent, with lower-rated debt generally supported by a hunt for yield fuelled by monetary policy easing by the world's major central banks.

Developments in Italy curbed appetite for low-risk German debt, although rising expectations the European Central Bank will cut interest rates later this year limited losses.

Bund futures were last down one tick on the day at 146.08. They rose as high as 146.77 on Tuesday, the highest since June 1, when it reached a record high of 146.89.

The German Ifo business sentiment indicator, due at 0800 GMT, will be closely watched for any sign of economic weakness that the ECB might use as an argument to cut rates.

"The Ifo will be key as we're now looking for (an ECB) move in May," one trader said.

Germany plans to sell 2 billion euros of 30-year bonds. Analysts expect demand for yield to push investors towards longer-dated maturities, with the spread between 10- and 30-year yields in Germany at relatively attractive levels of 92 bps versus January lows of 70 bps.

Outright 30-year yields were last at 2.19 percent, at the lower end of this year's roughly 2.10-2.50 percent range.

"The absolute level in yield is not generally interesting, but the 10/30-year curve is quite steep, so I expect good demand," UniCredit rate strategist Luca Cazzulani said. "Demand will mainly come from switches rather than from net buying."

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