Italian, Spanish bonds recover as riskier assets stabilise

LONDON: Italian and Spanish bond prices rose on Monday with investors buying back the cheapened debt as riskier assets stabilised after last week's selloff.

Peripheral euro zone bonds were caught in a sharp selloff in equity markets last week on concerns that the US Federal Reserve could start scaling back its stimulus programme in coming months if the economy continued to improve.

The European Central Bank would stick to its expansive monetary policy as long as was necessary, executive board member Joerg Asmussen said on Monday.

With US and UK markets shut for public holidays on Monday, European markets steadied with investors lured back into higher-yielding euro zone debt.

Italian 10-year yields were last down 9 basis points at 4.08 percent, having climbed near 1-1/2-week high of 4.18 on Friday, while equivalent Spanish yields were down 8 bps at 4.39 percent.

"The spread widening last week was too aggressive so it's not surprising to see some reversal and a tightening of spreads," said Alessandro Giansanti, a rate strategist at ING in Amsterdam.

"We have supply this week from Italy so that could have some pressure on Italian bonds, but what will drive the spreads this week is still what's going to happen in equity markets, especially in the US which is not open today."

European shares rebounded on Monday.

Italy will sell up to 3.5 billion euros in zero coupon and inflation-linked bonds on Tuesday and an estimated 6-7 billion euros of conventional medium- to long-term debt on Thursday which most analyst expect to meet with good demand.

German Bund futures slipped as riskier assets recovered but the losses were seen limited with analysts citing technical factors supporting the market.

The Bund future was last 7 ticks down at 144.51 and German 10-year yields 0.5 bps up at 1.40 percent.

The Bund is near a key support level, at 144.26, which is the 38 percent retracement of its recent rally, said Mathias van der Jeugt, a strategist at KBC in Brussels.

"Today we think this level will most likely hold because of the low volumes," he said.