* Italy bonds weather Berlusconi ruling
* No immediate Italian political crisis seen
* Bunds reverse losses after U.S. payrolls data
By Marius Zaharia
LONDON, Aug 2 Italian bonds outperformed their
euro zone peers on Friday as investors saw limited risk of an
imminent political crisis erupting over the conviction of former
Prime Minister Silvio Berlusconi.
While upholding his jail term, judges ordered a Milan court
to review a five-year ban on Berlusconi from public office,
enabling him to remain a senator and leader of his centre-right
People of Freedom Party for the moment.
The market moves underlined the strength of the Italian
market, where a diverse domestic investor base holds about two
thirds of total debt, while foreign investors find comfort in
the European Central Bank's conditional promise to buy bonds if
necessary to avert crisis.
"We believe this (Berlusconi) situation is a distracting
side show and will not materially affect government debt," said
Peter Wilson, senior portfolio manager at Wells Fargo Asset
Management, a firm with $450 billion under management.
"While more real work needs to be done - debt reduction,
austerity, structural reform - they have made good progress
supported by the ECB's OMT programme ... Using that as a base,
the bonds screen well from a value stand-point."
The premium offered by Italian 10-year bonds over benchmark
German Bunds fell to its lowest in
two months at 264 basis points. The equivalent spread of
two-year yields shrank to its narrowest in two months at 162
Italian yields were 7-10 bps lower on the day across
maturities, while most other euro zone yields were flat to
"Not a huge amount of flow behind this rally. The domestics
are supporting the rally in the face of not so good news, but
this is not a domestic-led only rally," one trader said.
"The end of the speculation about Berlusconi created
short-covering. At the end of the day policies are unlikely to
change dramatically and foreigners are also gaining more
Commerzbank rate strategist David Schnautz said an August
lull in debt auctions after Italy canceled its mid-month sale
also eased selling pressure on its bonds near-term but risks to
the country's political stability remained.
"The issuance calendar leaves some powder dry, enabling the
domestics to manage the market," he said.
"The reaction today is far from suggesting the market feels
this is a non-event. Some investors may have been reluctant to
make portfolio adjustments on a U.S. non-farm payrolls Friday,
but they could still do it in the next couple of weeks."
Italy is in a very strong position to weather any future
political shocks, having completed around 80 percent of its
funding target for this year, according to Reuters calculations.
Barclays strategists expect Italian redemptions and coupon
payments for the remainder of the year to be higher than the
amount of bonds sold by 18 billion euros ($24 billion).
Safe haven German Bund futures rose 22 ticks on the
day to 142.61, having rebounded from session lows of 141.67
after data showed the number of U.S. jobs outside the farming
sector increased by less than expected in July.
The data suggested the U.S. economy was still stuck in the
low gear and that will make the Federal Reserve reluctant to
withdraw monetary stimulus too quickly.