* Bunds hit two-week highs as sentiment sours
* Italian yields rise on political uncertainty
* Belgium to sell up to 3.5 bln euros of bonds
By Kirsten Donovan
LONDON, Oct 29 Spanish and Italian bond yields rose and German Bund futures hit two-week highs on Monday partly prompted by former Italian Prime Minister Silvio Berlusconi's threat to bring down the Rome government.
A string of disappointing corporate earnings late last week also weighed on equities and spurred bids for lower-risk assets such as German Bunds.
"Peripherals are under pressure so there does appear to be a euro-centric driver to the risk-off mood," said Richard McGuire, rate strategist at Rabobank."
"As time passes there should be a growing move towards pricing in an uncertainty premia to the Spanish curve...and Berlusconi's rant perhaps highlights the less than stable nature of Italian politics and reinjects some degree of political risk into BTPs."
In Italy, Berlusconi threatened to withdraw support for Mario Monti's government. Italian debt may also come under more pressure before a 7 billion euro 5- and 10-year bond sale on Tuesday.
For Spain, the issue was when it would ask for a bailout, which looks increasingly likely to be later rather than sooner.
ECB policymaker Ewald Nowotny said on Sunday Spain had no immediate need of help from the central bank's new bond-buying programme as it could refinance its debt on the markets at an acceptable cost.
Spanish 10-year government bond yields were 6 basis points higher at 5.67 percent, with their Italian equivalent up 7 basis points at 4.98 percent.
Coupon and redemption payments this week totalling almost 25 billion euros from Spain and redemptions of 14 billion euros from Italy should help contain selling pressure however.
"It doesn't mean we're going to have a positive performance this week by Spain and Italy but it does limit the downside to any sell-off," McGuire said.
Trading was likely to be subdued on Monday with U.S. equity markets shut and an early close recommended for fixed-income markets. Hurricane Sandy was set to hit much of the east coast, including New York.
German Bunds extended Friday's rally -- seen after global giants Apple and Amazon as well as European car maker Renault and electronics group Ericsson posted results which fell short of expectations.
Bund futures were last 37 ticks higher at 141.22, with 10-year cash yields down 3 basis points at 1.51 percent.
UBS technical analyst Richard Adcock said the jump higher in Bunds on Friday suggested that the recent rally can continue in the short-term, although the tone had not yet turned positive enough to persuade the bank to put bets on that move higher.
Belgium will kick-off the week's supply selling up to 3.5 billion euros of bonds, including maturities over 20-years. The sale is likely to benefit from investors looking for relatively-safe assets which pay a higher-yield than German debt. The auction will bring the country close to completing its 2012 issuance, if not meeting its 38.25 billion euro target.
Germany will sell ultra-long 2044 bonds and France debt with maturities between 10- and more than 20 years on Wednesday, something traders said may weigh on the long-end of yield curves as dealers sell bonds to make way for the new issuance on their books.
"The core issuance this week is skewed to the long end," one said. "That may create some steepening pressure."