* Investors dump peripheral debt on fears of Italy gridlock
* Scramble for safety lifts German Bunds to two-month highs
* Italian six-month borrowing costs soar
* Borrowing costs seen jumping at Thursday's bond sale
By Emelia Sithole-Matarise
LONDON, Feb 26 Italian bonds tumbled on Tuesday,
dragging other peripheral euro zone debt lower, after an
inconclusive election fuelled fears of political instability in
the region's third biggest economy.
Ten-year Italian bond yields, which rise as
prices fall, surged as much as half a point on the day to 4.86
percent, their highest since mid-December, leading Spanish
and Portuguese yields higher.
German Bund futures jumped to their highest in two months as
investors scrambled for the region's safest debt after a
surprisingly large protest vote in Italy left no group with a
clear majority in parliament.
Traded volume in Italian debt futures was its
second highest since the contract was launched in 2009.
Concern at the potential for political deadlock was
reflected in a sale of 8.75 billion euros of Italian short-term
debt, at which borrowing costs soared to their highest since
Analysts expected this trend to be mirrored at auctions of
up to 6.5 billion euro of five- and 10-year bonds on Wednesday.
Some analysts forecast 10-year Italian yields could hit 5.50
percent -- a level last seen in early September 2012 but still
well below levels above 6 percent hit in 2011 which prompted the
European Central Bank to start buying Italian and Spanish bonds
"We have a hung parliament with all the implications for
policymaking and reform progress. In that context, Italians have
also made it clear that they are not proponents of the austerity
and structural adjustment that are necessary for Italy in the
medium term," said Michael Leister, a rate strategist at
"This is a very bad outcome in market terms and this
sell-off has more room to go. The market will be looking at new
mutli-month highs (for Italian bond yields)."
Italian bonds again underperformed Spanish debt, with the
10-year Spanish yield premium over Italy last at 48 basis
points, its narrowest since June.
They also underperformed Ireland and Portugal, which have
been kept afloat by international bailouts since 2010 and 2011
respectively but have managed to slowly regain market confidence
with their reform efforts.
OPPORTUNITY TO BUY
The divided parliament and the massive surge of an
anti-austerity vote embodied by the meteoric rise of comedian
Beppe Grillo's 5-Star Movement and by the success of Silvio
Berlusconi's conservative bloc was the worst possible outcome
for markets, some analysts say.
Few market participants, however, saw Italian yields going
back above the 7 percent levels scaled in mid-2012, given the
backstop of the ECB's pledge to buy bonds at the request of a
Some said the sell-off in Italian bonds could lure back
"You look at the debt and deficit dynamics and Italy is no
worse than a lot of other European countries. On some metrics
it's probably even a little better," said Nicholas Gartside,
International Chief Investment Officer for Fixed Income at
JPMorgan Asset Management which manages $1.4 trillion.
"It's about valuation, that's what we're focused on and
there's a price when these assets become attractive."
In the euro zone's core, the Bund future was 120
ticks higher on the day at 144.71 with the German 10-year yield
down 10 basis points at 1.47 percent.
Technical charts point to further gains in the Bund future
after the contract broke through 144.30, the 62 percent
retracement of the December/January sell-off.
"With the MACD (moving average convergence/divergence) above
zero and Monday reflecting fresh bullish sentiment, the risk is
for continued upside as an attempt to close the previous
unfilled bearish gap from 145.52 and test of the 145.82/146.17
December highs is seen," said UBS technical analyst Richard