* Bargain-hunting after selloff helps Italy bonds recover
* Market seen volatile on Italy political deadlock
* Safe-haven German Bunds slip
By Emelia Sithole-Matarise
LONDON, March 5 Italian bonds recovered on
Tuesday as some yield-hungry investors picked up the cheapened
debt with the European Central Bank's bond-buying backstop
offsetting concerns over possible new elections in the country.
Centre-left leader Pier Luigi Bersani, who won a lower house
majority for his grouping in Italy's elections but could not win
the Senate, issued an ultimatum to anti-establishment leader
Beppe Grillo to support a new government or return to the polls.
Political uncertainty has hit Italian bonds but the ECB's
yet-to-be tested bond-buying backstop has prevented a deeper
Trade was expected to be volatile before an ECB policy
meeting on Thursday where President Mario Draghi is expected be
questioned on how the ECB scheme could be activated if Italy
does not have the reform-committed government required by the
central bank's support scheme.
"We're seeing quite a deal of volatility and some buyers
coming in after the selloff and consolidation of the past days,"
said Michael Leister, a senior rate strategist at Commerzbank.
"The market is hoping for some comment or some reassurance
that the ECB is ready to act, however at this point with the
political situation in Rome not clear we don't think Draghi will
deliver on these hopes."
Italian 10-year yields were last 12 basis
points down on the day at 4.74 percent.
They slightly outperformed Spanish bonds but
this was expected to be temporary. Italian assets were seen
coming under renewed selling pressure as long as the government
situation remained unresolved.
NO QUICK SOLUTION
"The trend for me is for wider spreads because the political
situation will not be solved quickly so there will be some more
volatility in the next few weeks," said Alessandro Giansanti, a
strategist at ING.
"We can go in 10-year (Italian) yields to 5.0-5.10 percet
but I don't think we will go back to (2012 highs above 6
percent) because of the ECB backstop."
In core euro zone markets, German Bunds dipped as the
tentative recovery in the periphery prompted some investors to
book profits after their climb to 2013 highs on Monday.
Traders said a deeper selloff in low-risk Bunds was unlikely
given concerns over Italy and expectations of a dovish stance
from the ECB on Thursday which could cement speculation of a
rate cut later in the year.
"(Italian debt) is stabilised for now and we are waiting to
see whether they can cobble together any form of government but
it can spiral so I don't see why Bunds should sell off," a
Bund futures were last 36 ticks down on the day at
145.15 while German 10-year yields were 3 bps up
at 1.45 percent.