* Italian yields rise, Bund futures hit new 2013 high
* Italian politics to remain key market driver near-term
* U.S. spending cuts kick in, growth worries pick up
By Marius Zaharia
LONDON, March 4 Italian bond yields rose on
Monday, with investors worried by the lack of progress in talks
to form a government to deal with the country's economic
Elections last week produced a hung parliament, raising the
risk of a prolonged political deadlock, repeat polls and the
paralysis of efforts to keep its 2 trillion public debt under
Pier Luigi Bersani, whose centre-left coalition has a lower
house majority but not enough seats to control the Senate, on
Friday ruled out a "grand coalition" with Silvio Berlusconi's
Comedian Beppe Grillo's 5-Star Movement, who came third,
will not give a vote of confidence to any government and only
consider backing individual laws. Grillo also said over the
weekend that he supported a non-binding vote on Italy's euro
Any agreement between the parties is seen as likely to be
weak and shot-lived, while a technocrat government pursuing
austerity is seen as an unpopular option that may increase
support for Grillo.
The uncertainty in Italy supported flows into top-rated
European debt, with German Bund futures holding on to
last week's gains of almost two full points and seen rising
"Italy is the main driver," Rabobank rate strategist Lyn
"You've got no real decision politically on what's going to
happen ... and whatever happens it's going to be messy."
Ten-year Italian bond yields were last 6 basis
points higher on the day at 4.85 percent, close to last week's
highs of just below 5 percent and compared with mid-January lows
of around 4.10 percent.
Analysts expect selling pressure in Italian bonds to
alternate with spells of buying interest from yield-hungry
investors taking comfort in the safety net provided by the
European Central Bank's so-far-untested bond-buying programme.
Bunds last traded 2 ticks higher at 145.53, having risen to
a new 2013 high of 145.80 earlier in the session. Risks to the
global economy were also keeping demand for German debt firm.
U.S. President Barack Obama and congressional Republican
leaders failed last week to find an alternative plan to avert
$85 billion worth of spending cuts, which economists expect to
hit growth in the United States and elsewhere.
Neither side has expressed any confidence an agreement will
be reached soon.
"With the Italy deadlock continuing and the U.S. budget
(impasse) I don't see any reason why Bunds shouldn't stay
supported," one trader said.