* Summers seen more hawkish than new frontrunner Yellen
* Italian bonds up on perception of less risk to government
* Portuguese bonds in focus as bailout review gets underway
By Ana Nicolaci da Costa and Emelia Sithole-Matarise
LONDON, Sept 16 Euro zone bond prices rose on
Monday after Lawrence Summers, widely seen by financial markets
as less committed to ultra-loose monetary policy, withdrew from
the race to head the U.S. Federal Reserve.
Euro zone debt rose across the credit spectrum as investors
bet Summers' withdrawal eased the risk of a Fed leadership that
would rein in its programme of support for the economy faster
next year than currently expected.
The other leading candidate to head the central bank, Fed
deputy chief Janet Yellen, is seen by markets as likely to be
more supportive of existing policy and less likely to scale bond
purchases back quickly and raise rates.
Summers' decision comes just before the Fed meets this week
to decide when and by how much to trim its asset purchases from
the current pace of $85 billion a month.
"The timing of Summers' withdrawal took markets by surprise
and the rally in Treasuries has given a boost to Bunds and
gilts," said RIA Capital Markets strategist Nick Stamenkovic.
"That clearly makes Janet Yellen front runner for new Fed
chairman. She is known as a key supporter of QE and the market
is taking the view that interest rates will be kept lower for
The Bund future was up 51 ticks at a settlement
close of 138.50 with German 10-year yields down
2.8 basis points at 1.895 percent.
U.S. Treasuries outpaced their German counterparts,
squeezing the 10-year T-note yield premium over Bunds by 5 bps
to 87 bps.
German 10-year yields have pulled further away from a
1-1/2-year high of 2.059 percent hit on Sept. 6, as mixed U.S.
economic data clouded the outlook on how fast the Fed would
scale back its monetary stimulus.
By late trade, riskier periphery bonds outperformed. Italian
10-year yields were down 8.6 basis points at 4.48 percent
and Spanish equivalent were 7 basis
points lower at 4.43 percent.
"With this ... withdrawal of Larry Summers from the Fed
race, the market is pricing in a more dovish Fed going forward
and this of course is helping the whole periphery," Alessandro
Tentori, global head of rates strategy at Citi said.
Italian bonds outperformed Spanish ones, tightening the
yield spread between the two by 4 basis points to 3 basis
Italian yields overtook their Spanish counterparts for the
first time in 18 months last week due to political uncertainty.
Allies of Silvio Berlusconi have been threatening for weeks
to bring down the left-right coalition of premier Enrico Letta
if a Senate committee meeting this week votes to bar him from
In recent days, political sources have suggested the
centre-right leader is backing away from an immediate government
crisis and elections for fear this could misfire while an
opinion poll on Monday showed Silvio Berlusconi's party falling
behind its centre-left rivals.
"You have the fact that the country has heavily
underperformed the likes of Spain over the last two weeks... and
there's maybe some speculation that the vote on Berlusconi will
not (lead to) a government collapse," Tentori said.
Portuguese bonds rebounded, having fallen earlier in the
day, pushing yields 13 basis points lower to 7.32
The country however remained vulnerable as investors fretted
about Lisbon's relationship with its international backers.
For the first time since Portugal received its bailout in
2011, European Union and International Monetary Fund officials
arriving on Monday will have to deal with new Deputy Prime
Minister Paulo Portas, who nearly brought down the government in
July by challenging the pain of austerity measures.
Portugal may seek a precautionary loan deal when its bailout
ends next year, Portas said on Monday, but would seek to avoid
following Greece into a second rescue.
"At the end of the day, what counts is that you have a
country that has maybe underperformed more than others and once
the risk-on (takes hold) people just look at what's cheap and
buy that," Tentori added, explaining the rebound in Portugal.