* Spanish and Italian yields rise as political risks grow
* 2013 rally in peripheral bonds reaching stretched levels
* Bunds rebound but remain lower after late Friday selloff
By William James
LONDON, Feb 4 Spanish and Italian government
bond yields rose on Monday as investors grew wary that mounting
political uncertainty in both countries could derail this year's
strong rally in higher-yielding euro zone debt.
In Spain, Prime Minister Mariano Rajoy was facing calls to
resign over a corruption scandal, and in Italy
the growing popularity of former premier Silvio Berlusconi was a
worry for investors in the run-up to elections this month.
"It's that worry of political instability in both Spain and
Italy," a trader said. "Rajoy is under a bit of pressure and
Berlusconi seems to be making a good old comeback in the polls
"A lot of people have been bullish Spain and Italy for a few
months and it's come a long way but there's a lot of supply to
get through and a lot of the early-year money has gone to work."
Peripheral debt has enjoyed a strong start to the year,
aided by the easy supply of cash from central banks and the
promise that the European Central Bank will step in and buy
bonds of struggling states if necessary.
Spanish 10-year government bond yields rose 10
basis points to 5.32 percent while Italian yields
were 9 bps higher at 4.42 percent.
Commerzbank strategists said the time was right to start
cutting back investments in peripheral debt as current low yield
levels tested technical supports and the Spanish political risks
"Uncertainty from the accusations (against Rajoy) has the
potential to weigh on sentiment, giving investors second
thoughts about overweight positions in the periphery in general
and Spain in particular at current spread levels," they said in
a note to clients.
Rajoy denies any wrongdoing.
German Bund futures, often used as a hedge against
a flare-up in the region's weaker sovereigns, trimmed early
losses when Spanish and Italian bonds started trading but, at
141.78, remained 23 ticks lower than at Friday's settlement.
Much of that fall can be attributed to a steep selloff in
U.S. Treasuries late on Friday after labour market and
manufacturing data showed recovery in the world's largest
economy remained on track.
"Sentiment still remains pretty negative for Bunds. We're
testing support around 1.7 percent. To get through that level
we're going to need to see further signs of improving sentiment
towards the euroland economy," said Nick Stamenkovic, strategist
at RIA Capital Markets.
Any rally in Bunds was likely to be used by others as a
chance to sell but the potential for another major selloff
remained limited due to the sheer scale of recent falls,
The 10-year German yield was last at 1.69
percent, 2 bps higher on the day and 32 bps up compared to
levels seen on the final trading session of 2012.