* 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
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
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
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
"The core issuance this week is skewed to the long end," one
said. "That may create some steepening pressure."