Italian bonds rise as property tax deal eases political crisis
* Property tax deal offers respite to Italian debt
* Italian bond sale hits upper end of target
* Bunds edge up on caution over Syrian turmoil
By Emelia Sithole-Matarise
LONDON, Aug 29 (Reuters) - Italian bond prices pushed higher on Thursday with a debt sale going well after the government agreed to scrap a property tax, for now smoothing over divisions in the country's fragile ruling coalition.
Low-risk German bonds also rebounded on uncertainty over the West's response to turmoil in Syria as the threat of an imminent military strike appeared to ebb.
The Italian deal replacing the levy on primary properties with a "service tax" offered respite for the country's debt. But strategists said political tensions could flare again in coming weeks when lawmakers decide whether former premier Silvio Berlusconi should be ejected from parliament after his tax fraud conviction.
Auction costs rose for a new five-year bond rose, but longer-term yields were stable and Italy managed to sell all the 6 billion euros it was targeting.
"It's a reasonably positive set of results, perhaps aided in part by the ruling coalition's agreement yesterday as regards the contentious issue of property taxation," said Richard McGuire, senior fixed income strategist at Rabobank.
"While political risk in Italy will remain elevated over the immediate term as Berlusconi's uncertain tenure within the Senate places a question mark over the government's longevity, today's sales give no indication these concerns are having much in the way of a material impact on investor appetite."
Italian 10-year yields were last 4 basis points down on the day at 4.36 percent with the Spanish equivalent 1.4 bps lower at 4.52 percent.
Italian bonds have recently underperformed their Spanish counterparts but started clawing back some ground on Wednesday as the government looked close to meeting demands by Berlusconi's centre-right party to scrap the property tax.
The Spanish/Italian yield spread has widened to 16 bps from its tightest in 1-1/2 years at 2 bps on Tuesday, with some strategists expecting it to expand further in coming days. Month-end-related buying is seen favouring Italian debt as domestic investors return after the European summer break.
"The odds are for a spread reversal in the near term, with upcoming month-end index extensions being supportive for BTPs, domestic political risks abating and next week's Spanish government bond auctions moving into the market's focus," Commerzbank strategists said in a note.
"However, with additional policy risks looming large in September we see good reason to sideline our peripheral spread tightening view versus Bunds," they said, citing a potential escalation of the Syrian crisis.
The Bund future was last 34 ticks up at 140.64, reversing earlier losses with the move gaining momentum on what traders said was technically-led buying after stops were triggered around 140.40.
German 10-year yields were 2.8 basis points down at 1.85 percent, drawing away from Friday's 1-1/2 year high, though some in the market said the prospect of upbeat U.S. data could curb further fall in yields.
"Maybe in the near term we could have a decline of the 10-year Bund yield closer to 1.80 percent and if there's some real concern on the geopolitical situation it could go just below 1.80," said BNP Paribas strategist Patrick Jacq.
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