* Italy, Spanish bonds supported by domestic buying
* Recovery seen short-lived as political concerns persist
* Focus on ECB's Draghi when he speaks in Spain
By Emelia Sithole-Matarise
LONDON, Feb 12 Spanish and Italian bonds inched
up on Tuesday as some domestic buyers took advantage of a recent
sell-off, but the recovery looked fragile given political
uncertainty in both countries.
Trade in the two periphery nations' paper has been choppy
over the past week as Spanish Prime Minister Mariano Rajoy faces
calls to resign over a corruption scandal while in Italy,
ex-premier Silvio Berlusconi's comeback in polls less than two
weeks before elections is unsettling investors.
Spanish 10-year yields fell 6 basis points on
the day to 5.38 percent, having risen to a seven-week high
around 5.55 percent last week as Madrid fought to shake off the
scandal, in which Rajoy denies wrongdoing.
"Some domestics are buying after the sell-off but not much.
We have Draghi speaking in Spain and that might be interesting
but we might see another leg down, especially in (Italian) BTPs
with supply tomorrow," a trader said.
European Central Bank President Mario Draghi is due to
address Spanish lawmakers later on Tuesday to explain and defend
the ECB's current monetary policy strategy against a backdrop of
heightened concerns about the strong euro. Draghi is also
expected to meet Rajoy, but the market does not expect them to
discuss a potential aid request by Madrid that could trigger the
ECB's bond purchase scheme.
Italian bonds underperformed their Spanish equivalents, with
10-year BTPs yielding 3 bps less on the day at 4.58 percent
That underperformance, not only against Spanish but also
against Irish debt, is expected to be exacerbated going into
Italy's sale of up to 5.25 billion euros of bonds on Wednesday
where borrowing costs are expected to rise on election jitters
even though redemptions will likely ensure ample demand.
"There will be some focus on Italian auctions tomorrow to
see how that goes as the elections near. Yields have gone up a
little bit and that will be reflected in the auctions but we
expect them to get the bonds away," said Lyn Graham-Taylor, a
strategist at Rabobank.
Spanish short-term auction yields were little changed on
Tuesday at a sale of 6- and 12-month bills.
Reflecting the defensive posture some analysts are adopting
on Italy, Unicredit strategists saw scope for further gains in
favouring Irish debt, which rallied sharply last week after
Ireland concluded a bank debt deal that will reduce its
borrowing costs for the next decade.
They moved their "buy' stance on Irish 2018 bonds against
Italy to a spread target of -50 bps from -30bps.
"The reason for shifting out the target is to let the profit
run and be in the position of capturing the current positive
momentum as well as a possible overshooting of markets sentiment
both in positive terms versus Ireland and in negative terms
versus Italy," they said in a note.
At the euro zone's core, German Bund futures were
last 3 ticks up on the day at 142.88. The contract has struggled
to decisively break above 143.00 for two consecutive sessions
which technical analysts say could pave the way to 143.15, the
200-day moving average which would herald further gains.
Earlier news of a nuclear test by North Korea had no
apparent impact on the market.