* Political uncertainty to push up Italian borrowing costs
* Demand seen healthy thanks to ample redemption in Feb
* German sale to benefit from investors locking in profit
By Ana Nicolaci da Costa
LONDON, Feb 8 Worries about this month's Italian
elections may make it more costly for the country to raise funds
next week even though plentiful redemptions in February should
help to attract demand.
Increased returns offered by two-year bonds are also likely
to secure demand at a two-year German bond sale, as investors
seek to lock in higher yields after the European Central Bank
said monetary policy is accommodative.
Political uncertainty was fuelled by calls for the Spanish
Prime Minister Mariano Rajoy to step down over corruption
allegations against his party, and a scandal involving Italy's
Monte dei Paschi bank also dented appetite for lower-rated debt.
This backdrop forced Spain to pay more to raise funds this
week and Italy's borrowing costs are seen rising too at the
auction next Wednesday.
Italy will issue between 2.5 and 3.5 billion euros of 2015
bonds and between 1 and 1.75 billion euros of 2026 and 2040
bonds. This is the first time since May 2011 that the Treasury
is offering a 30-year BTP in a regular auction.
But demand is still expected to be healthy, helped by nearly
30 billion euros ($40 billion) of Italian redemption and coupon
payments due in February, according to Tradeweb data.
Final polls before the Feb. 24-25 vote showed the
centre-left is on course to win Italy's election despite a
remarkable surge by Silvio Berlusconi, but it is likely to have
to form a governing coalition with outgoing premier Mario Monti.
"It's not necessarily that there would be a less
constructive outcome of the Italian elections but there are a
lot of uncertainties involved," Norbert Aul, rate strategist at
RBC Capital Markets said.
He expected a back-up in yields to lure demand even though
he was recommending investors reduce exposure to sovereign
debtors on the euro periphery after being positive towards those
markets for seven months.
"What we have seen already in the Spanish auction - the
pullback in yields that we've had made sure that we saw
sufficient demand at the auction - there will be something very
similar in Italy as well," Aul added.
LOCKING IN RETURNS
Analysts expected ample appetite for Germany's 5 billion
euros of two year bonds, betting that investors will want to
lock in higher returns.
The sell-off in German debt so far this year has pushed
two-year yields to 0.18 percent in the secondary
market from as low as -0.045 percent in late December.
"What was important yesterday was the (ECB President Mario)
Draghi commentary which said that they would make sure that the
stance of monetary policy remains accommodative," said Harvinder
Sian, rate strategist at RBS, adding that Draghi had also made
stronger comments on the euro exchange rate than the market had
expected. "The backdrop is more supportive now."
The ECB will monitor the economic impact of a strengthening
euro, ECB President Mario Draghi said on Thursday.
The Netherlands will also sell 2.0 to 3.0 billion euros with
the reopening of its 2018 bond next week - the first auction
since the Dutch government said it had put together a
nationalisation package to prevent SNS Reaal's collapse and
shore up confidence in the financial system.
The rescue will add to a budget deficit that is already
forecast to exceed European Union targets in 2013 but credit
rating agencies S&P and Moody's said on Monday it would not cost
the country its prized triple-A rating.
"We will get 30 percent of the DSTA's (Dutch State Treasury
Agency) overall capital market funding target over in the next
six weeks, which will be weighing on the Dutch bond market," Aul