* Italian borrowing costs rise as Monti says quitting early
* Move casts uncertainty over country's political future
* Market positioning increases the risk of sell-off
* Spanish yields also rise, Bunds benefit
By Ana Nicolaci da Costa
LONDON, Dec 10 Italian government bond yields
jumped on Monday a decision by Prime Minister Mario Monti to
step down early left the country's political future unclear,
hurting riskier euro zone debt.
Monti said on Saturday he would resign once the 2013 budget
was approved, raising questions over who will take the reins of
the euro zone's third largest economy at a time when it remains
a focus of the region's three-year debt crisis.
His announcement, potentially bringing forward an election
due early next year, came after former prime minister Silvio
Berlusconi's party withdrew its support for the government and
he said he would run to become premier for a fifth time.
"Berlusconi's actions have created a degree of uncertainty
in the market with regards to the Italian political scene,"
Justin Knight, European rates strategist at UBS said.
"Part of the problem here is that investors outside of Italy
are not positioned very well for this," he said. "They're quite
close to neutral versus benchmarks, having previously been
underweight of both Spain and Italy. Some investors are now
overweight, and we have seen more investors going overweight
over the last few weeks."
Top-ranking German bonds benefited. Bund futures
were 22 ticks higher at 145.94, pushing 10-year yields
1.8 basis points lower to 1.28 percent.
Ten-year Italian borrowing costs, meanwhile,
jumped 36 bps to 4.90 percent, while the Spanish equivalent
was 18 bps higher at 5.7 percent.
Spanish Economy Minister Luis de Guindos said on Monday his
country, which continued to study the need for outside financial
aid, would suffer contagion from Italy's political turmoil.
Analysts said uncertainty regarding the make-up of Italy's
next government and its commitment to austerity was behind the
rise in yields rather than the prospect of Berlusconi's return
to power, given opinion polls give him little chance of success.
Five-year credit default swaps (CDS) on Italian government
debt rose 33 bps to 288 bps, according to data monitor Markit.
This means it costs $288,000 annually to buy $10 million of
protection against an Italian default using a five-year CDS
"Any question over their dedication to austerity is not
going to be good for BTPs (Italian debt) especially given the
fact that everyone is long," said one trader in reference to the
recent bout of buying based on the prospect of European Central
Bank support.HIGHER BORROWING COSTS
Alessandro Giansanti, senior rate strategist at ING, said
Monti's move could see 10-year Italian yields rise to 5.25
percent over the next two weeks as it will complicate the
passage through parliament of measures aimed at keeping the
country's debt in check.
The ECB's promise to buy bonds of countries that ask for
financial help has seen Italian borrowing costs fall some 200
basis points since July's high of 6.7 percent - a level viewed
as unsustainable for long-term funding.
"The main risk is that the measures that the current
government will need to pass come (under threat)," Giansanti
The sell-off could be accentuated by the extent of the
recent bond rally and as liquidity thins into the end of the
year, he added.
Against this backdrop, Italian debt auctions this week may
prove more challenging, even though decent demand was still
Rome plans to sell 6.5 billion euros of one-year bills on
Wednesday and will offer three-year bonds on Thursday in the
last sales to be settled in 2012.
"I don't think the market is really going to take Italy to
task, unless they struggle with the BTP auction this week, which
I don't think they will," Marc Ostwald, strategist at Monument
"I would say they will make a big concession for them."
Spain's Treasury will also issue bonds - due 2015, 2017 and
2040 - on Thursday, in its last bond auction of this year.