* Supply next week adds to this week's snap auction
* Spanish bonds give up some gains vs Italy
* Italian parliament meets for first time since election
* Post-election Italian yield range may hold - analyst
* Two-year Portuguese bonds gain as troika completes review
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, March 15 Spanish bond prices fell on
Friday, giving up some of their recent gains against Italian
counterparts, as the country lined up further debt auctions next
week after a snap sale of long-dated debt this week.
They also underperformed German Bunds after weak U.S. data
lifted demand for low-risk debt to the detriment of
higher-yielding assets, lifting the Bund future 25
ticks on the day to settle at 143.39.
Spain is expected to sell up to 4.5 billion euros of 2015,
2018 and 2023 bonds after it sold 800 million euros of
ultra-long dated paper on Thursday in an off-calendar auction as
it sought to take advantage of market resilience after Italy's
Spanish 10-year yields rose 7 basis points to
4.93 percent, with shorter-dated yields also rising on the day.
"Spain has supply next week after they had an extra auction
this week all at the long end, and we have seen them
underperform since then. They had reached rich levels and I
would expect them to underperform into next week's supply." a
The backup in 10-year Spanish yields widened the gap with
Italian debt of the same maturity by 10 basis
points on the day to 32 bps, having narrowed to 10 bps earlier
this week, the tightest since March 2012.
Traders say many investors, looking beyond Italy's
post-electoral gridlock, still think Spain, which is suffering
from a banking crisis and ballooning budget deficits, is the
bloc's bigger long-term problem.
Italian 10-year yields were last 3 bps lower at 4.61 percent
as the country's parliament convened for the first time since
last month's election, with parties still deadlocked over
forming a government.
A 2.85 billion euro debt buyback using proceeds from
privatisation money offered marginal support to Italian bonds,
traders said. Political wrangling in coming days, however, may
heighten volatility in one of the world's largest debt markets,
making some analysts wary of calling an end to Italian debt's
underperformance of Spanish counterparts.
"The near term political outlook in Italy is very uncertain.
Overall investors don't seem to be too worried about it but it
could go in ways that would create quite a bit of stress for the
market," said Riccardo Barbieri, a strategist at Mizuho.
"A much higher share of Italian bonds are held domestically
which makes the market more resilient. People believe the OMT
(ECB bond buying plan) is a credible backstop but I prefer to
wait for the moment until I have a stronger view on the
political side of things."
Analysts say the leadership vacuum in Italy after its
inconclusive Feb. 24-25 vote could derail its efforts to return
to growth and keep its finances in check.
Italian bonds have so far been largely able to weather the
heightened uncertainty as investors continue to chase the
relatively high yields on offer, encouraged by the perceived
safety net offered by the ECB's untested bond-buying programme.
"So far we've seen a strong (willingness) by investors in
the market to take any episode of weakness as a buying
opportunity. I don't think that will change next week,"
UniCredit rate strategist Luca Cazzulani said.
The post-election range of roughly 4.6 percent to 4.9
percent in Italian 10-year yields should hold in the near term,
said Viola Julien, a fixed-income analyst at Helaba Landesbank
Two-year Portuguese yields fell eight basis
points on the day to 3.22 percent, outperforming other
short-dated euro zone paper as the troika of international
lenders completed their seventh review of Lisbon's bailout
The country was given more leeway to meet its budget
deficits, as expected, and its finance minister Vitor Gaspar
said that a bond sale might be on the cards in the coming weeks.
After fellow bailout recipient Ireland's successful 10-year
bond issue this week, investors are increasingly betting that
Portugal will follow in its footsteps and its yields could start
converging towards those of other peripheral issuers.