October 31, 2011 / 4:36 PM / 8 years ago

EURO GOVT-Italian yields jump on uncertainty over euro plan

* Bunds rally as rescue euphoria fades
    * Italian yields rise to near euro era highs, ECB intervenes
    * Curve-flattening highlights credit concern

    By Marius Zaharia and Kirsten Donovan	
    LONDON, Oct 31 (Reuters) - Italian bond yields rose on
Monday, prompting the European Central Bank to buy the debt, as
euphoria over Europe's plan to contain its debt crisis cooled
and worries emerged that a G20 summit this week could
disappoint.	
    There are still questions about the plan, notably over how
the EFSF euro rescue fund will be leveraged and the meeting of
the Group of 20 is expected to reveal little support from
countries such as China or Japan for its special purpose
vehicle.	
    "Markets are in a risk off mode again because there are a
lot of worries that Europe's politicians won't get too much help
from the rest of the G20 states regarding money for the EFSF,"
said Christian Reicherter, analyst at DZ Bank.	
    The Italian/German 10-year government bond yield spread
 widened by some 30 bps to 410 bps, nearing euro
era highs and the 2/10 year Italian yield curve flattened around
10 basis points to the least in a month.	
    "The worrying sign is the front-end of the curves coming
under pressure as they price in the increasing risk of a credit
event," Rabobank rate strategist Richard McGuire said. "Clearly
last week's summit has only had a transitory impact."	
    Cash 10-year Italian yields rose above 6 percent -- despite
traders saying the ECB was buying Italian and Spanish debt in
secondary markets -- trading at levels last seen before the
central bank resumed its bond purchasing programme.	
    ING strategists recommended new long positions in Italian
10-year paper at these levels, on the view that the ECB would
cap the rise in yields. DZ Bank's Reicherter said it was safer
to wait until the ECB's meeting on Thursday to assess how open
the bank is to stepping up its purchases under its new Italian
chief Mario Draghi. 	
   	
    UNCERTAINTY	
    Bund futures rose by almost two full points. The
December contract last traded 169 ticks higher on the day at
135.36, while Bund yields were 14.1 bps lower at 2.042 percent. 	
    Uncertainty over policymaking will probably keep markets
volatile in November as well, with October's 133-139 range
likely to be tested again, traders said.  	
    Bunds lost some ground last week after the new measures to
tackle the euro crisis were announced, but tepid demand at an
Italian bond sale on Friday, which pushed yields at the auction
to euro era highs, reflected doubts that those plans would be
enough and marked a turnaround in sentiment.	
    Lloyds Bank strategists said that in order to keep investors
interested in riskier assets "the (G20) summit must show results
beyond a common statement highlighting the global support on
Europe's effort to stir out of the crisis, producing specific,
concrete and tangible promises from at least the U.S., Japan and
China that they will invest in the EFSF."	
    Elsewhere, Belgian bonds underperformed other euro zone
issuers, with the exception of Italy with 10-year bond yields
 9 basis points higher at 4.42 percent as the
country sold 2.155 billion euros of bonds 	
    "The Belgian auctions were OK rather than strong, as the
amount raised was only in the middle of the target range," said
Credit Agricole rate strategist Orlando Green.	
    Despite Belgium's underperformance on the back of supply,
ING rate strategists recommend a long Belgium versus France
position on the view that the two countries' credit ratings
would converge.	
    France's triple-A status has recently come under closer
scrutiny on concerns its participation in increasing the
firepower of the EFSF could worsen its finances.	
    French 10-year yields were last 3.6 bps lower
at 3.13 percent.
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