* Italian, Spanish bonds firm; buyers nibble at cheapened
* Periphery still shaky on nagging political concerns
* Slightly dovish ECB tone underpins demand for Bunds
* Irish bonds firm on brighter outlook after bank debt deal
By Emelia Sithole-Matarise
LONDON, Feb 8 Spanish government bond yields
dipped on Friday as some buyers bought the cheapened bonds after
this week's sell-off but sentiment remained fragile on concerns
over a corruption scandal.
Spanish debt outperformed Italian paper, which has come
under pressure as former Prime Minister Silvio Berlusconi's poll
ratings have picked up ahead of elections in two weeks.
Investors fear his potential comeback to the centre of the
country's politics could derail its austerity programme.
Shorter-dated Spanish bonds led Friday's rally, driving
two-year yields 10 basis points lower to 2.72
percent. Traders cited domestic buying of the debt, which is
likely to become the main target of a yet-to-be triggered
European Central Bank bond purchase scheme.
Spanish 10-year yields were down 6 bps at 5.35 percent
, aided by healthy demand at the country's bond
auction on Thursday.
"There maybe some correction after the recent rewidening of
spreads and it seems to be coming from the domestic front and
maybe some follow-up buying after the strong auction yesterday,"
said Mathias van der Jeugt, a rate strategist at KBC.
"We'll likely still see increased volatility and nervousness
but I think neither the Italian elections nor the political
scandal in Spain will bring back the level of stress we saw at
the height of the crisis in 2011 or 2012."
Spanish and Italian yields have tumbled from euro-era highs
above 7 percent hit scaled last year after ECB President Mario
Draghi vowed in July to do whatever it took to preserve the
euro, backed in September by the new bond purchase plan.
The rally has braked this month, however, with Spanish Prime
Minister Mariano Rajoy under pressure to resign over a political
scandal in which he denies wrongdoing, and Italian elections -
including Berlusconi's potential return - rattling investors.
"On the 10-year Spanish bonds, we could go significantly
above 5.50 percent and reach the 5.60 area and it can be quite
fast, and on the (Italian) BTP 4.70-75 area could be reached as
well," BNP Paribas strategist Patrick Jacq said.
"On a longer-term view we still expect market friendly
outcomes of the political issues and the setbacks offer some
opportunities to enter long positions."
Both Italy and Spain were seen lagging lower-rated Irish
bonds, whose rally was given fresh impetus on Thursday after
Dublin clinched a bank debt deal that will cut the country's
borrowing costs over the next decade.
The benchmark Irish 10-year yield fell 6 bps
on Friday, to 3.93 percent, its lowest level since before the
start of the subprime crisis in 2007.
"Obviously Ireland is trading through Italy and it can have
further legs. Such a trade will even benefit from Ireland being
flat and Italy getting some issues with the elections,"
Commerzbank strategist David Schnautz said.
At the top-end of the euro zone credit spectrum, German
Bunds also rose on Friday after comments from ECB chief Draghi
fuelled speculation the bank may be willing to cut interest
rates if the euro continues to strengthen.
The Bund future was last 15 ticks up on the day at
142.97 with German 10-year bond yields at 1.50 percent
, down 1 basis point.
German yields, led by two-year paper, extended this week's
falls after Draghi said on Thursday the ECB would monitor the
economic impact of a strengthening euro, feeding expectations
the surging currency will open the door to an interest rate cut.
He also played down a rise in money market rates.