Italian bond yields rise as political tensions flare anew
* Italian bonds lag other euro zone debt on politics
* Italy to sell up to 6 billion euro of debt on Friday
* Bunds slightly lower as new U.S. jobless claims fall
By Ana Nicolaci da Costa and Marius Zaharia
LONDON, Sept 26 (Reuters) - Italian government bond yields jumped on Thursday as tensions within the country's fragile governing coalition flared up again, a day before an auction at which Italy aims to raise up to 6 billion euros.
Italian bonds underperformed all other euro zone paper as centre-right deputies supporting former premier Silvio Berlusconi renewed threats to resign if their leader is expelled from parliament after a tax fraud conviction.
Traders said investors were also making room for a sale of five- and 10-year Italian bonds on Friday. A sale of two-year zero-coupon bonds on Wednesday was well-received, as was a six-month bill sale on Thursday.
"Political uncertainty is kicking Italy hard," Investec chief economist Philip Shaw said.
"The economy needs some certainty in terms of the stability of the government and it also needs for investors to have an idea of what the next fiscal moves are so the political situation can have an impact on economic growth going forward."
The premium paid by 10-year Italian debt over its German equivalent widened to its highest in over a week at 256 bps, while the cost of insuring Italian debt against default was at a two-week high of 246 bps, according to Markit.
Ten-year Italian government bond yields rose 9 basis points to 4.32 percent, while Spanish yields rose 5 basis points to 4.34 percent.
But Sergio Capaldi, fixed income strategist at Intesa SanPaolo, said the consequences of a government collapse would be too serious for policymakers to allow it to happen.
"The political situation in Italy is very confused and the most likely scenario is a scenario where those threats are not followed by any concrete actions," he said.
Investec's Shaw said threats to sink the Italian government are likely to be only a "bluff" and recommends investors to look at opinion polls when judging the risk of early elections. A mid-September poll showed Berlusconi's party falling behind its centre-left rivals.
The return of political tensions could make it more costly for Italy to raise funds after the Treasury raised its issuance target for 2013. Italy is looking to borrow about 470 billion euros this year and the same next year, the head of debt management at the Treasury said on Tuesday.
But Italy is already in a comfortable funding position, having completed nearly 80 percent of this year's revised target, and analysts expected Friday's sale to go smoothly.
"Overall and with this concession being priced in, I think it should go fine. Domestic support should be factored in as well and this back-up in yields should also be helpful," said Michael Leister, senior interest rate strategist at Commerzbank.
Some analysts expect Italian yields to once again overtake Spanish ones and for Italy's debt to underperform that of its peripheral peer in the coming months. Spanish yields fell below Italy's for the first time in 18 months earlier in September.
"We like Spain more than Italy in general," Capaldi said.
"Italy ... is lagging behind many macro-issues. We still have deep problems with competitiveness and the improvement in the trade deficit that we have seen is cyclical and not structural. So I would say there are many reasons to say that Spain is showing signs of resilience and Italy is not."
Other euro zone debt prices were little changed, with the Bund future closing 7 ticks down at 139.87 after data showed a fall in new U.S. jobless claims.
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