Slovenian yields surge after PM loses party leadership
* Slovenia's yields jump on political uncertainty
* Greek 10-year yields hit one-month high after EC report
* Fitch upgrade of Spain drives Spanish yields lower
* Economic fundamentals of euro zone peripherals improving (Updates prices)
By Emelia Sithole-Matarise
LONDON, April 28 (Reuters) - Slovenian bond yields rose sharply on Monday after Prime Minister Alenka Bratusek, under whose government the country averted an international bailout last year, lost the leadership of her centre-left party.
Zoran Jankovic, the mayor of Ljubljana, regained charge of the Positive Slovenia party at a weekend congress. His election throws into doubt the survival of the ruling coalition, whose three other members have said they will not cooperate with Jankovic, who is under investigation for corruption.
Greek bonds also sold off after the European Commission said the country where the euro debt crisis began was still dependent on its international lenders to stay fully funded despite this month's market return.
Slovenia bore the brunt of the sell-off in the euro zone's weaker bond markets on investor concern that the fall of Bratusek's government and early elections would slow efforts to shore up the economy of the former Yugoslav republic.
Slovenian 10-year yields rose 29 basis points to a two-week peak of 3.99 percent, before closing at 3.87 percent.
"The market clearly doesn't like it when you have volatility in the government, especially for a country like Slovenia where there's a lot to do," said ING strategist Alessandro Giansanti.
"We expect in the short term the risk of having a political crisis will result in some widening in Slovenia spreads, especially for a country that has been performing well over recent months."
Like other vulnerable euro zone economies, Slovenia has enjoyed a sharp drop in its borrowing costs this year, with 10-year yields falling back to 2007 lows as investors see economic recovery easing the debt strains in the currency bloc.
Slovenia bailed out its mostly state-owned banks a few months ago, escaping the need to seek an international rescue.
"This is clearly negative for the country's sovereign bonds, but there are a number of supporting factors suggesting to us any sell-off should be moderate," said Richard Segal, a credit strategist at Jeffries.
Slovenia has already borrowed aggressively in dollar and euro debt markets over the past few months, giving it a "substantial" funding cushion, he said, and most of the difficult policy decisions had already been taken.
Greek 10-year yields hit a one-month high of 6.47 percent after the European Commission said the country faced a funding gap of 5.5 billion euros ($7.6 billion) through to the end of May 2015.
Yields on the first five-year bond Greece sold since its 2012 default were 5 bps higher at 5.01 percent, rising above its issuance level of 4.95 percent though the move was in line with other euro zone bonds of similar maturities.
"It's a knee-jerk reaction to these numbers on the financing gap," said Michael Michaelides, a strategist at RBS.
"It's negative because the EU is trying to push them into a full bailout package which might have some more risks but on the other hand there are other ways in which even the report says this gap might be solved."
Elsewhere in the market, Spanish 10-year yields slipped back towards 8-1/2-year lows after Fitch upgraded Spain's ratings against a backdrop of generally improved appetite for the debt of euro zone peripheral economies.
Fitch lifted Spain's outlook by one notch to BBB+ after the market close on Friday, three notches above sub-investment grade, citing better financing conditions.
Fitch had earlier improved the outlook on Italy, which along with Spain was at the forefront of the region's debt crisis two years ago. S&P also raised its rating on bailed-out Cyprus, suggesting the recovery was spreading to the peripheral states left most exposed to the financial crisis.
Spanish 10-year yields fell 1 basis point to 3.06 percent, not far from an 8-1/2-year low of 3.04 percent hit last week. Equivalent Italian yields were 3.14 percent, staying within reach of a record low of 3.07 percent plumbed a week ago.
The European Central Bank's looser monetary policy has encouraged investors hunting for higher returns to bet on recovery in countries worst affected by the debt crisis.
The markets' focus this week will be on euro zone inflation data, which could determine whether the ECB takes measures as early as next week if inflation undershoots forecasts.
($1 = 0.7227 Euros) (Editing by Catherine Evans)
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