* President's re-election could end Italian political
* Italian debt gains, drags up rest of periphery
* German Bunds dip but rate cut bets limit losses
By Emelia Sithole-Matarise
LONDON, April 22 Italian bonds rallied on
Monday, outperforming low-risk German Bunds, with more gains
seen in the near term after the re-election of Italy's president
raised the prospect of an end to two months of political
A broad agreement between traditional political groups on
the left and right to re-elect Giorgio Napolitano handed the
87-year-old the leverage to pressure opposing parties in Italy
to form a government or face a snap election.
Italian BTP futures were a full point up at 114.02
while 10-year cash yields fell 12 basis points to
4.10 percent, around their lowest level since the end of
January. Other peripheral euro zone bond yields fell in their
"The near-term reaction is positive for Italy and to some
extent for all peripheral markets. However, things are not
settled yet and the risk of an early election favouring
(ex-premier Silvio) Berlusconi has not disappeared completely,"
said Patrick Jacq, a strategist at BNP Paribas.
Italy has been in the grip of political uncertainty since
inconclusive general elections in February. Nevertheless, the
country's bonds have been resilient with investor concerns that
a prolonged political impasse could re-ignite the region's debt
crisis tempered by the European Central Bank's debt buying
backstop and loose monetary policy by major central banks.
"In the current scenario of accommodative monetary policy,
the Italian debt remains very attractive in terms of carry
versus other EMU core debt where record low yields are far less
attractive," Annalisa Piazza, market economist with Newedge
Strategy said in a note.
A hunt for higher returns spurred in recent weeks by the
Bank of Japan's huge stimulus plans has also driven down euro
zone debt yields.
Spanish 10-year yields were down 8 bps at 4.57
percent, with Portuguese equivalents down 12 bps
at 5.98 percent, breaking below 6 percent for the first time
since late January.
Portuguese borrowing costs have held steady in the face of
growing public protests against austerity, suggesting investors
still believe the European Union will make the country's bailout
"We see flows coming from European domestic buying at the
moment. Going to (yield) lows we reached this year will probably
offer a pretext for some profit taking but the situation is
still favourable to peripherals," BNP's Jacq said.
At the upper end of the credit spectrum in the euro zone
debt market, German Bunds held largely steady, with investors
wary of taking big positions before key manufacturing data on
Tuesday expected to show growth remained anaemic in the euro
zone, cementing market bets of a cut in official interest rates.
The Bund future was last 5 ticks up on the day
146.08 German 10-year yields were flat at 1.25
The Bund contract came off the day's low of 145.72 after ECB
Vice President Vitor Constancio was quoted as saying inflation
in the euro zone was coming down "rather significantly",
important when the central bank decides whether to cut rates.
"The ECB tone has been pretty dovish...they are telling us
that they are lining up for a rate cut," a trader said.