EURO GOVT-Italian bonds jump after new government formed

Mon Apr 29, 2013 4:01am EDT

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By Marius Zaharia

LONDON, April 29 (Reuters) - Italian government bond yields fell on Monday and were expected to ease further as new Prime Minister Enrico Letta prepared to set out his administration's programme, ending two months of political deadlock.

Prices for low-risk German Bunds fell slightly, but losses were limited by expectations the European Central Bank will cut interest rates to new record lows on Thursday.

In Italy, Letta, of the centre-left, was expected to win parliament's backing in a confidence vote at 1300 GMT. He relies on the support of his centre-right rivals, led by former premier Silvio Berlusconi.

An inconclusive election in February left Italy, the euro zone's third-largest economy, without an effective government, threatening investor confidence and holding up reform efforts.

BTP futures were last 77 ticks higher at 115.18. Cash Italian 10-year yields were 9 basis points lower at 3.98 percent, some 27 bps more than benchmark Bunds.

"The room is open for further spread tightening," said Richard McGuire, senior rate strategist at Rabobank in London.

"This is not to say the Italian government is not susceptible to risks... There are doubts about both efficacy and longevity," he said, adding that the Italian/German 10-year yield spread could narrow to 200 bps.

Italy dragged other higher-yielding markets with it, with Spanish 10-year yields down 4 bps at 4.24 percent.

Appetite for riskier assets has been strong this year, with investors looking to maximise returns as abundant central bank liquidity drives rates lower across the board.

Italy will issue up to 6 billion euros of five and 10-year bonds at auctions later on Monday and analysts said Italy could outperform Spain once the sale was out of the way.

"I believe demand at the auction will be good," said Mathias van der Jeugt, rate strategist at KBC in Brussels.

"There is the effect of the new Italian government, which is positive for sentiment. Last week Italian bonds have underperformed Spanish bonds, which makes them relatively attractive ... and I expect the underperformance to unwind."

Bund futures were 9 ticks lower at 146.45, with 10-year cash yields 1 bps higher at 1.22 percent.

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