* 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 rose on
Tuesday as some domestic buyers took advantage of a recent
sell-off, but the recovery could be temporary 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 13 basis points on
the day to 5.31 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.
"We've had some decent buying, mainly domestics in Spain.
Our feeling has been that the political crisis in Spain was
fairly overblown," a trader said. "Relative to Italy which still
has the election hanging over it, Spain is the more stabler
affair," a trader said.
The spotlight stays on Madrid where European Central Bank
President Mario Draghi is due to address Spanish lawmakers later
on Tuesday to explain and defend the ECB's current 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.
Spanish short-term auction yields were little changed on
Tuesday at a sale of 6- and 12-month bills.
Italian bonds rose in tandem with their Spanish equivalents,
with 10-year BTP yields down 10 bps on the day at 4.52 percent
after the country successfully sold 8.5 billion
euros of one-year debt, though at a higher cost.
Italy's borrowing costs are also expected to rise at a sale
of up to 5.25 billion euros of bonds on Wednesday on mounting
tensions before the Feb. 24 elections, though redemptions should
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
rate strategist at Rabobank.
The rebound in Italian bonds was, however, expected to
fizzle out as the elections approach as investors worry that
a strong rally in the polls by Berlusconi could result in a
fragmented parliament. That could hamper Rome's ability to push
through structural reforms needed to cut the country's massive 2
trillion euro debt pile.
Those concerns were keeping some investors sidelined from
Italian sovereign debt for now.
"We've done a bit (of buying) in Italy. But to do more we
want to see some clarity coming from Italy on the results of the
elections," said Rose Ouahba, head of fixed income at Carmignac
Capital Plus which manages 808 million euros.
"We all know the impact of Berlusconi coming back on the
political scene would be damaging for the Italian spread. We did
not want to increase our exposure for now. We're looking more to
increase our exposure if we have confirmation that we re not
going to have a hung parliament," she said.
Also 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 lower 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