* 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 Marius Zaharia
LONDON, March 15 (Reuters) - Italian bonds were steady on Friday 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.
“If there is no capable government any time soon ... (Italian bonds) should come under pressure again,” said Viola Julien, a fixed-income analyst at Helaba Landesbank Hessen-Thueringen.
The Feb. 24-25 vote produced a hung parliament, with the centre-left winning control over the lower house but not of the Senate. Analysts say that the leadership vacuum could derail Italy’s 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 European Central Bank’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.
Italian 10-year yields were trading three basis points lower at 4.61 percent, having traded slightly higher on the day before the buyback. Helaba’s Julien said the post-election range of roughly 4.6 percent to 4.9 percent should hold in the near term.
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 programme.
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 would start converging towards those of other peripheral issuers.
“We like playing the convergence via two to three-year switches out of Italy and Spain into Portugal,” Commerzbank strategists said in a note.
Bund futures were a tick higher on the day at 143.15, while cash 10-year German yields were steady at 1.47 percent.
Traders said that U.S. manufacturing data later in the day could be key for the near-term trend for Bunds after a tight trading range in the past couple of sessions.
“The market is positioned for a strong (number), but there is potential for disappointment, and that could support Bunds,” one trader said.