* Slovenia's yields jump on political uncertainty
* Greek 10-year yields hit 1-month high after EC report
* Fitch upgrade of Spain drives Spanish yields lower
* Economic fundamentals of euro zone peripherals improving
(Updates prices, adds rise in Greek yields, more comments)
By Emelia Sithole-Matarise
LONDON, April 28 Slovenian bond yields rose
sharply on Monday after Prime Minister Alenka Bratusek, whose
policies averted an international bailout last year, lost the
leadership of her ruling centre-left party.
The government's survival is in doubt after Bratusek lost
the leadership of the Positive Slovenia party to Zoran Jankovic,
the mayor of Ljubljana. The party's three coalition partners
have said they will not cooperate with Jankovic, who is under
investigation for corruption.
Greek bonds also sold off after the European Commission said
the country where the euro debt crisis began was still dependent
on its international lenders to stay fully funded despite this
month's market return.
Slovenia bore the brunt of the sell-off in the euro zone's
weaker bond markets on investor concern that the fall of
Bratusek's government and early elections would slow efforts to
shore up the economy of the ex-Yugoslav republic.
Slovenian 10-year yields jumped 26 basis points
to a two-week peak of 3.96 percent.
"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 vulnerable euro zone economies, Slovenia has
enjoyed a sharp drop in its borrowing costs this year, with
10-year yields falling back to 2007 lows as investors see
economic recovery easing the debt strains in the currency bloc.
Slovenia bailed out its own banks a few months ago.
"This is clearly negative for the country's sovereign bonds,
but there are a number of supporting factors suggesting to us
any sell-off should be moderate," said Richard Segal, a credit
strategist at Jeffries.
Slovenia has already borrowed aggressively in dollar and
euro debt markets over the past few months, giving it a
"substantial" funding cushion, he said, and most of the
difficult policy decisions had already been taken.
Greek 10-year yields rose 21 bps to a one-month
high of 6.47 percent after the European Commission said the
country faced a funding gap of 5.5 billion euros ($7.6 billion)
through to end-May 2015.
Yields on the first five-year bond Greece sold since its
2012 default were 5 bps higher at 5.01 percent,
rising above its issuance level of 4.95 percent though the move
was in line with other euro zone bonds of similar maturities.
"It's a knee-jerk reaction to these numbers on the financing
gap," said Michael Michaelides, a strategist at RBS.
"It's negative because the EU is trying to push them into a
full bailout package which might have some more risks but on the
other hand there are other ways in which even the report says
this gap might be solved."
Elsewhere in the market, 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.
Fitch lifted Spain's outlook by one notch to BBB+ after the
market close on Friday, three notches above sub-investment
grade, saying its financing conditions had improved.
Fitch had earlier improved the outlook on Italy, which along
with Spain was at the forefront of the region's debt crisis two
years ago. 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.
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.
($1 = 0.7227 Euros)
(Editing by Gareth Jones/Ruth Pitchford)