February 11, 2013 / 12:35 PM / 5 years ago

EURO GOVT-Political risk weighs on lower-rated debt

* Peripheral seen vulnerable to more selling
    * Not much expected from meeting of euro zone finmins
    * Quiet start to the week as Asia closed for holidays

    By Ana Nicolaci da Costa
    LONDON, Feb 11 (Reuters) - Spanish and Italian bond yields
rose slightly on Monday, with a sell-off in lower-rated debt
expected to continue due to political uncertainty in Spain and
jitters ahead of an Italian election this month.
    Analysts were not expecting much news from a euro zone
finance ministers meeting at which the strength of the euro
could be discussed before a G20 meeting at the end of the week.
    A peripheral bond rally paused last week as Spanish Prime
Minister Mariano Rajoy faced calls to step down over corruption
allegations and a scandal involving Italian bank Monte dei
Paschi fuelled political uncertainty before elections there.
    As long as these issues remained unresolved, investors may
favour Bunds over lower-rated debt, analysts said.
    "Near term, I think (the periphery) can continue to
underperform because the situation in these countries remains
relatively unclear," said Patrick Jacq, rate strategist at BNP
Paribas. "Whether it's in Spain or in Italy, we have some
political issues and in the near term, this (will) continue to
(weigh) on these markets." 
    Ten-year Spanish government bond yields were
up 4.8 basis points at 5.43 percent, having risen about 48 basis
points since late January.
    Equivalent Italian borrowing costs were up 1.7
bps at 4.59 percent, having climbed 45 bps over the same period.
    "(The sell-off) can continue a little bit because we are
still not pricing in correctly, or to the full extent, the
Italian political risk," Citigroup strategist Alessandro Tentori
    There was a small chance that the formation of a coalition
government could temporarily hinder policy-making or that
parties would fail to agree a coalition, which would prompt new
elections, he added.
    The centre-left is on course to win Italy's Feb 24-25 vote 
despite a remarkable surge by former premier Silvio Berlusconi,
final polls showed on Friday but it is likely to have to form a
coalition with technocrat outgoing Prime Minister Mario Monti. 

    Trade was thin with most Asian bourses closed for the Lunar
New Year holiday, including those in China, Hong Kong, Singapore
and South Korea, and Japan also closed for a public holiday.
    German Bund futures were 10 ticks lower at 142.73,
with traders saying the contract had met technical resistance at
143.11 - the day's high.
    Analysts were also more favorable on German Bunds than other
higher-rated government bond markets.
    "We still like to be underweight France versus Germany, so
we think France has the potential to widen a bit further,"
Tentori said. 
    "It's a matter of investor positioning - so everybody is
long, it's a matter of France being a strong net issuer, net
supplier of bonds for the next two months and it's a matter of
also of the fundamentals not having picked-up."
    The 10-year yield spread between French and German bonds
  was at 63 bps, unchanged from the
previous trading session.
    With no major economic data this session investors would
look to euro zone industrial production numbers on Wednesday and
gross domestic product figures on Thursday for the latest gauge
of the struggling economy.
    Attention will also be on Thursday's Italian bond sale,
which will see the offering at a regular auction of a 30-year
BTP for the first time since May 2011. 
    The nervous backdrop is likely to force Italy to pay more in
order to get the bonds away, but analysts expect the sale of
three separate bonds including those maturing in 2015 and 2026
to benefit from heavy redemption flows in February.
    "We are quite optimistic that they will make it, there will
be no negative surprise," Piet Lammens, strategist at KBC said.
"Ahead of the Italian elections, there is a bit of a risk but we
think Italian banks will be there to get enough bonds placed in
the market."
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