Spain, Italy yields rise as U.S. budget impasse drags on
By Emelia Sithole-Matarise
LONDON Oct 8 (Reuters) - Spanish and Italian bond yields rose on Tuesday as lack of progress in resolving the U.S. budget stalemate made investors wary of exposure to riskier assets.
Plans for both countries to sell bonds via syndication also put their debt under pressure, halting a relief rally in Italy after Enrico Letta's government won a confidence vote last week.
Italy plans to issue its first ever seven-year bond on Wednesday, when Spain will also launch its first 30-year transaction since 2009.
Spanish 10-year yields were up 8 basis points to 4.30 percent while their Italian equivalents were 6 bps higher at 4.35 percent.
Overall, however, the market focus remained on developments in the United States where the U.S. government shutdown entered a second week with concerns growing about the implications of a prolonged standoff on the world's biggest economy.
European equities fell for a fourth session as investors fretted that Republicans and Democrats will not reach an agreement on the budget nor on raising the debt ceiling ahead of an Oct. 17 deadline, which could result in a U.S. debt default.
"This U.S. debt debate is overshadowing everything else. Everyone agrees that we will get some agreement given the catastrophic consequences if we don't, but equally people are quite convinced that it will take until the 11th hour to get there," said Commerzbank strategist Michael Leister.
"In the meantime we have uncertainty and risk aversion creeping back into the market ... Peripherals have cooled down after the rally last week as the willingness or appetite to take on risk is rather limited."
Many U.S. economic data releases, including the closely-watched monthly payrolls report, scheduled for Friday, have been delayed by the government shutdown, leaving investors focused on the political developments in Washington.
Most market participants see the United States as unlikely to miss payments on its debt because a default would have severe consequences, disrupting short-term funding and potentially sharply raising the country's borrowing costs.
"DOWN TO THE WIRE"
"We still think that there will be a resolution and ultimately core yields will move higher, but at the moment, with the uncertainty, if it gets dragged down to the wire, that points to riskier assets continuing under pressure," said Alan McQuaid, chief economist at Merrion Stockbrokers.
Portuguese yields nudged lower after the Bank of Portugal revised its 2013 economic outlook to a more moderate contraction - an even more optimistic view than the government's recently revised forecast.
Yields have been falling since last Friday, after Lisbon's international lenders approved progress under its bailout, but the rally has been losing steam on the U.S. political situation.
In core euro zone debt, German Bunds retreated with UK gilts after data showed more evidence of a recovery in Britain's economy and housing market, and as the market absorbed top-rated debt supply from the Netherlands.
The Bund future was last 26 ticks down on the day at 140.05 with German 10-year yields 2.5 bps higher at 1.83 percent. In the absence of a breakthrough in Washington, market participants expect the German yields to oscillate around the 1.72-1.85 range they have traded in over the past week.
"We're just stuck in a political mire and there's no conviction to the market," said Nick Stamenkovic, a strategist at RIA Capital Markets. "Treasuries and Bunds remain rangebound and I don't see that changing until we see some shift in the fiscal environment in the United States."
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