CORRECTED-Italy yields fall as debt buyback eyed

Mon Dec 9, 2013 6:21am EST

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(Corrects headline and first paragraph to debt buyback instead of exchange)

By Emelia Sithole-Matarise

LONDON Dec 9 (Reuters) - Italian bond yields fell on Monday, outperforming euro zone peers a day before a debt buyback aimed at easing the country's 2015 and 2017 repayment burden.

Perkier demand for risk assets after upbeat Chinese export data at the weekend also underpinned demand for lower-rated euro zone bonds.

The Italian Treasury will buy back on Tuesday floating rate notes (CCTs) maturing in Dec. 2014 and Sept. 2015, fixed rate bonds maturing in March 2015 and April 2015 and bonds linked to euro zone inflation maturing in Sept. 2017.

This follows a bond exchange three weeks ago where it successfully swapped 2015 and 2017 paper for 2018 bonds to help ease near-term debt repayments.

Italian bonds also benefited from reduced supply pressure after Rome cancelled its mid-month bond auction, having completed its 2013 funding thanks to a record retail-targeted bond sale last month.

"The treasury is planning to reduce the cliff of redemptions for 2014 and 2015 with longer maturities so that's positive news for Italy and that could be another driver for tightening of spreads," said ING strategist Alessandro Giansanti.

"I think the treasury will offer some good pricing and there will be a good opportunity for investors to give back the bond and extend on the curve to move to five years, where there's higher yield."

Italian 10-year yields were last 4 basis points lower at 4.16 percent with Spanish equivalents trading at the same level, down 3 basis points.

Waning fears of an Italian government collapse, after Prime Minister Enrico Letta survived a confidence vote last month and former premier Silvio Berlusconi was expelled from parliament, also supported demand for the country's bonds.

FED OUTLOOK

Spanish bonds have also fared well since Standard & Poor's became the second rating agency in less than a month to revise its outlook on the country's rating to stable from negative.

The yield gap between 10-year Spanish and German bonds is now near its tightest in five weeks, at around 232 bps.

The firmer tone for riskier assets kept core German Bunds on the back foot. Bund futures were down 11 ticks on the day at 140.00 with cash 10-year yields 1 basis point up at 1.85 percent.

Uncertainty over when the U.S. Federal Reserve might start scaling back its bond purchases was also keeping investors wary. Jobs numbers on Friday beat expectations but left some analysts sceptical that the rise was strong enough to prompt immediate action from the Fed, which holds its final policy meeting of the year next week.

"We'll remain nervous until the Fed meeting on 17th and 18th. This week trade will remain patchy and there's just dribs and drabs of data and also supply in the U.S. which could keep people cautious," a trader said. (Editing by Catherine Evans)

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