Italian bonds underperform again as costs rise at auction
* Italian yields rise at auction
* Italian debt broadly underperforms many euro zone bonds
* Ten-year German yields struggle to rise much above 2 pct
By Ana Nicolaci da Costa
LONDON, Sept 12 (Reuters) - Italian bond yields rose on Thursday and the country paid more to raise funds at an auction, highlighting investor concerns about a political crisis that some worry could stall efforts to revive the economy.
Rome sold the maximum planned amount of 7.5 billion euros and demand for its three-year bond was higher than at an auction of similar paper in July.
But its cost of borrowing over three years was the highest in nearly a year, reflecting the political tensions and a broad rise in yields on riskier assets as investors anticipate the gradual withdrawal of U.S. monetary stimulus.
"In general, the auction was decent but not very strong given the cheapening of the Italian paper both versus the curve and versus other periphery (debt) like Spain," said Annalisa Piazza, market economist at Newedge.
"Market players are still sceptical on the political situation, the risk that the recent development will lead to a political crisis that could further delay the ongoing structural reforms programme and also delay the fiscal consolidation process for 2013."
Ten-year Italian yields were up 1.9 basis points at 4.54 percent, as Italian debt underperformed many of its euro zone counterparts including Germany and Spain.
The premium offered by 10-year Italian bonds versus German debt widened 8 basis points to 260 basis points.
The Italian/Spanish equivalent rose as far as 7 basis points as Italian bonds continued to lag their Spanish counterparts.
German Bunds jumped 70 ticks to 137.80 pushing 10-year German yields 6 basis points lower to 1.94 percent. They hit a 1-1/2 year high on Friday at 2.059 percent but have struggled to get much above 2.00 percent in recent sessions.
Italy's underperformance also reflects concerns over the country's economic outlook. Italian industrial output was much weaker than expected in July, data showed on Thursday, pouring cold water on hopes that the country might emerge from its longest post-war recession in the third quarter.
The European Central Bank meanwhile warned of increasing risks surrounding Italy's 2013 deficit target - a view the country's welfare minister said was shared by the Italian government.
Italian yields overtook Spanish ones for the first time in 18 months this week and analysts say the spread could rise more.
"Ten-year yields are moving more into positive territory over the Spanish equivalent. To me it looks like the risk is that it could go a little bit further in the short run, as long as this political issue with Berlusconi drags on," ICAP strategist Phillip Tyson said.
"But I wouldn't expect it to go too far right now, because even if it does prompt the withdrawal of support for the government, the president is going to be keen to get some kind of coalition government in place rather than call new elections before there has been any meaningful electoral reform."
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