* Italian debt under pressure on political tensions
* ECB expected to stay on hold; Bund in ranges
* Investors continue to seek French bonds at auction
By Ana Nicolaci da Costa
LONDON, Dec 6 Italian and Spanish government
bonds fell on Thursday as political developments in Italy
prompted investors to cash in on a recent rally, giving German
Bunds a lift before a European Central Bank decision.
Italian premier Mario Monti's government survived a Senate
confidence vote on economic measures but a walkout by Silvio
Berlusconi's PDL party indicated political tensions were rising
before an election expected in March..
Italian debt came under selling pressure and Spanish debt
followed suit a day after a disappointing Spanish bond sale also
underscored the limits of a bond rally, which traders said was
based on sentiment after a deal on Greek debt rather than on
"After the recent rally this is very good opportunity to
sell Italy," one trader in Milan said.
Ten-year Italian government bond yields
increased 12 bps to 4.59 percent and the Spanish equivalent
rose 12 bps to 5.54 percent.
German Bund futures were 10 ticks higher on the day
at 143.38. The December contract rolls over on Thursday and the
March contract was up 13 ticks on the day at 145.23.
The sell-off in peripheral bonds came just before the ECB
was due to announce the results of a policy meeting. It was
likely to keep interest rates on hold but may offer clues on its
policy path for next year with updated forecasts likely to
present a grim outlook for the euro zone economy.
Analysts expect the ECB will also reiterate that an aid
request is a pre-requisite for the bank to buy the bonds of
indebted euro zone states.
"The ECB will keep the door open for maybe another refi rate
cut early next year," Patrick Jacq, European rate strategist at
BNP Paribas said.
"I think there will be no change from the latest press
conference in early November. That's probably why the market is
relatively stable today ahead of the meeting."
On Nov. 8, ECB President Mario Draghi said the euro zone
economy showed little sign of recovering before year-end,
leaving open the possibility of an interest rate cut in the
"I don't think many people are expecting a cut, but people
generally are expecting a slight dovish tone overall," a second
Long-term worries about the euro zone and more immediate
concerns about talks in the United States aimed at averting a
fiscal crisis have recently benefited safer government bonds.
French 10-year yields hit euro-era lows on
The backdrop helped a 3.97 billion euro sale of French
bonds. The Treasury sold at the top of its target range as
investors sought the liquidity and safety of the French market,
even after Moody's downgraded the euro zone's second largest
economy's credit rating last month.
In the secondary market, 10-year French yields were up 2.1
basis points at 2.02 percent.
"Even at 2 percent, (the French yield) might be (at)
euro-era lows, but it's still cheaper than German," a second
trader said, predicting the premium 10-year French debt offers
over Germany would fall further as year end approaches from 69
basis points currently.