* Bund yields edge up after Friday's sharp fall
* Italian Senate set to start debate on Berlusconi expulsion
* Analysts see Spanish yields falling below Italian ones
By Marius Zaharia
LONDON, Sept 9 German government bonds weakened
on Monday, reversing some of Friday's sharp gains made on
below-forecast U.S. jobs data, as investors continued to bet on
the U.S. Federal Reserve trimming monetary stimulus this month.
Italian bonds were steady as the Senate in Rome was set to
begin a debate on whether to expel former premier Silvio
Berlusconi from parliament in a move that threatens the
country's left-right coalition.
Last week's non-farm payrolls report added an element of
uncertainty to expectations that the U.S. central bank will move
to trim its bond buying at its Sept 17-18 meeting.
But 13 of 18 primary dealers in a Reuters poll taken on
Friday after the data said the Fed will still decide to start
reducing stimulus this month. That was up from nine dealers a
month ago. The median of forecasts was for a cut of $15 billion
per month, down from $18 billion in the August poll.
"What happened on Friday doesn't change the big picture,"
ING rate strategist Alessandro Giansanti said. "The big picture
is that the Fed will reduce the amount of liquidity in the
market ... and the risk is still towards higher (yields)."
Bund futures were 30 ticks lower at 137.39, while
cash German 10-year Bund yields rose 3.1 basis
points to 1.975 percent, having fallen some 10 bps on Friday.
Although that was the biggest daily fall since February, it
only reversed the rise in yields on Thursday, when the European
Central Bank could not convince markets that it can keep its
promise to hold rates at record lows as the economy recovers.
Bets on the euro zone economic recovery were still keeping
Bunds weak and helped them move in the opposite direction to
U.S. Treasuries on Monday. U.S. T-note yields fell 3
basis points to 2.91 percent.
"The non-farm payrolls was the first (set of data) to
disappoint in the last few weeks. We haven't had one in the euro
zone, so it makes sense for Bund yields to play a bit of
catching up with Treasuries," one trader said.
ING's Giansanti said supply pressure from bond sales in the
Netherlands and Germany later this week also weighed on Bunds.
While looking more stable on Monday after a 30 bps rise in
the past month, Italian yields remained vulnerable to political
risks and analysts expected them to soon rise above Spain's.
"Italian political wobbles are definitely there in play
...We like Spain for choice - it is a bit more stable at this
moment in time," a second trader said.
Commerzbank and Credit Agricole rate strategists also
recommended investors to bet on Spain outperforming of Italy,
which is due to sell bonds on Thursday.
At 4.49 percent, Italian 10-year yields were
only 2 basis points below the Spanish ones.
"This has been quite a crowded trade, but it can continue,"
said Marius Daheim, chief strategist at Bayerische Landesbank,
adding that Spanish yields could fall 13-15 bps below Italy's.