Italy bonds extend relief rally on ebbing political tensions

LONDON Fri Oct 4, 2013 4:18am EDT

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LONDON Oct 4 (Reuters) - Italian bonds rose on Friday, extending this week's relief rally after Prime Minister Enrico Letta's government won a confidence vote in parliament.

Italian debt outperformed low-risk German Bunds in a market seen range-bound as investors weighED the potential consequences of a lengthy U.S. budget standoff on the world's biggest economy.

A partial U.S. government shutdown due to the row has delayed the closely-watched U.S. jobs report, which was due on Friday. The data is a key factor in the Federal Reserve's deliberation sover when to scale back its bond purchases.

Any further delays in its release could boost expectations the central bank will maintain the size of its monetary stimulus for longer than initially thought, possibly into 2014.

With scant top-tier data to focus on, markets were looking to political developments in the United States and in Italy, where a Senate committee was likely to start a process to expel former premier Silvio Berlusconi from parliament after his tax fraud conviction.

Italian 10-year yields were down 4 basis points at 4.34 percent while Spanish equivalents were 2 bps lower at 4.23 percent.

Italian yields have fallen about 40 bps this week after members of Berlusconi's centre-right party rebelled against his threats to pull out of the ruling coalition.

"We are seeing reduced political risk in Italy following relief that Letta survived the no-confidence vote ... We are seeing a bit of short covering in Italian bonds after the sell-off we saw at the start of the week," RIA Capital Markets strategist Nick Stamenkovic said.

Some in the market said that while reduced political risks in Italy and successful Spanish auctions on Thursday supported lower-rated euro zone debt, Bunds were unlikely to sell off given the political impasse in the United States.

Lack of progress in ending the partial U.S. government shutdown is feeding worries that lawmakers will not agree a deal to raise the debt ceiling before a mid-October deadline.

The likelihood of an actual default is seen as slim.

"As the lingering uncertainty is increasingly feeding into sentiment and the stand-off is unlikely to conclude today, we expect Bunds to trade well-supported into the weekend and opt for longs in the Bund future," Commerzbank strategists said in a note.

The Bund future was last 2 ticks up at 140.25 with German 10-year yields steady at 1.81 percent.

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