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* Slovenia's yields jump on political uncertainty
* Fitch upgrade of Spain drives Spanish yields lower
* Economic fundamentals of euro zone peripherals improving
By Emelia Sithole-Matarise
LONDON, April 28 Slovenian bond yields rose
sharply on Monday after Prime Minister Alenka Bratusek lost the
leadership of her ruling centre-left party, threatening the
Bratusek lost the leadership of Positive Slovenia to Zoran
Jankovic, the mayor of Ljubljana. But the party's three
coalition partners have said they will not cooperate with
Jankovic, who is under investigation for corruption.
Elsewhere in the market on Monday, Spanish 10-year yields
slipped back towards 8-1/2-year lows after Fitch upgraded
Spain's ratings against a backcloth of generally improved
appetite for the debt of euro zone peripheral economies.
However, the fall of Slovenia's government and early
elections would slow efforts to improve the economy of the tiny
ex-Yugoslav republic, which has been showing tentative progress.
Slovenian bonds underperformed the euro zone market, with
10-year yields jumping 22 basis points to 3.91
percent in early trade.
"The market clearly doesn't like it when you have volatility
in the government, especially for a country like Slovenia where
there's a lot to do," said ING strategist Alessandro Giansanti.
"We expect in the short term the risk of having a political
crisis will result in some widening in Slovenia spreads,
especially for a country that has been performing well over
Like other peripheral countries, Slovenia has seen its
borrowing costs fall sharply this year, with 10-year yields
falling back to 2007 lows as investors regain confidence in the
euro zone region as fears about its debt crisis ebb.
Slovenia only narrowly avoided needing an international
bailout a few months ago, but its banks still face problems that
could drag on if the political situation deteriorates.
"Whilst we do not see this as a credit blow-up event, we
think the bonds should trade meaningfully wider, perhaps by as
much as 50 basis points," RBS strategists said in a note.
"We now attach an 80 percent probability that the government
breaks down and Slovenia is forced down the road of early
elections," they said.
FITCH BOOSTS SPAIN
Fitch lifted Spain's outlook by one notch to BBB+ after the
market close on Friday, three notches above sub-investment
grade, saying the country's financing conditions had improved
and the economic outlook was less certain.
On a day of scheduled credit reviews by the ratings
companies, Fitch had earlier improved the outlook on Italy,
which along with Spain were two years ago at the forefront of
the region's debt crisis. S&P also raised its rating on
bailed-out Cyprus, suggesting the recovery was spreading to the
peripheral states left most exposed to the financial crisis.
Spanish 10-year yields fell 2 basis points to
3.07 percent, not far from an 8-1/2-year low of 3.04 percent hit
last week. Equivalent Italian yields were a touch up
at 3.12 percent but stayed within reach of a record low of 3.07
percent plumbed a week ago.
"It (the Fitch ugprade) is confirmation of what the market
has already seen in the last few months reflected in the sharp
rally in peripherals," said ING's Giansanti.
"Underlying fundamentals for the peripheral countries in
general are improving, economic growth and fiscal policy are
improving, so the market is more confident that the current
governments of peripheral countries are more reliable than in
the past in keeping public finances under control."
The European Central Bank's looser monetary policy has
encouraged investors hunting for higher returns to bet on
recovery in countries worst affected by the debt crisis.
The markets' focus this week will be on euro zone inflation
data, which could determine whether the ECB takes measures as
early as next week if inflation undershoots forecasts.
(Editing by Gareth Jones)