* Italian yields seen rising further above Spain's
* Underperformance, domestic investors to support Italian
* Ten-year German yields struggle to rise much above 2 pct
By Ana Nicolaci da Costa
LONDON, Sept 12 Italian bonds lagged their
Spanish counterparts as Rome prepared for a bond sale against a
challenging backdrop, with investors pricing in a simmering
political crisis in Rome and plans to issue more debt.
Italy will offer up to 7.5 billion euros of paper maturing
in 2016 and 2028, as well as floating rate bonds.
Italian bonds' recent underperformance and appetite from
domestic investors should underpin the sale, but any market
relief will be short-lived as they remain vulnerable to adverse
political developments, analysts said.
Prime Minister Enrico Letta warned on Wednesday that
political turmoil was driving up Italy's borrowing costs as the
future of Silvio Berlusconi remained uncertain.
The former premier faces possible expulsion from parliament
following a conviction for tax fraud last month, with his
supporters alternating pledges of loyalty with threats to bring
down the government if he is forced out.
"We (have seen) quite a concession ahead of the auction,
both at the short end and the longer and so I think that should
enable supply to be relatively well-absorbed," Nick Stamenkovic,
bond strategist at RIA Capital Markets said.
"Even so, it's difficult to see a strong rally in BTPs given
the uncertain political outlook. Consequently I think Spanish
bonds continue to outperform Italian bonds in the near term."
Ten-year Italian bond yields were up 1.4 basis
points at 4.54 percent and the Spanish equivalent
were 1.4 basis points lower at 4.48 percent, widening the spread
between the two to 5 basis points from 3 bps on Wednesday.
Italian yields overtook Spanish ones for the first time in
18 months this week and analysts are expecting the spread to
widen, also citing Italy's intention to issue more debt in 2013
while Spain plans to scale back monthly bond offerings.
At the other end of the credit spectrum, German bonds rose
in tandem with U.S. Treasuries after strong demand at a 10-year
Bunds were were 41 ticks higher at 137.51.
Ten-year German bond yields were 3 basis points lower at
1.97 percent, having hit a 1-1/2 year high at 2.059 percent on
Friday. It has struggled to rise much above 2 percent in recent