Italian yields to fall, Bunds dip on new Italian PM

LONDON: Italian government bond yields were set to fall on Monday, with safe-have German Bunds coming under pressure, after Italy appointed a new Prime Minister to speed up economic reform.

The political change was mostly priced into the market last week and demand for Italian paper will be tested with the sale of up to 3 billion euros of 5-year bonds with the relatively small size of up to 3 billion euros expected to be covered, albeit at a high price.

Italian BTP futures were 80 ticks higher at 94.45 but the relief any relief from the euro zone debt crisis may be short lived with efforts to construct a financial firewall to protect Italy, Spain and potentially France struggling to overcome legal and politcal obstacles.

"The bond auction should go fine in this environment," said a trader. "We expect to see it come through the market level, wherever that is at the time, although it will still be expensive for them in outright terms."

Following Italian Prime Minister Silvio Berlusconi's resignation, the country's president Giorgio Napolitano asked former European Commissioner Mario Monti on Sunday to form a government to restore market confidence

Concerted European Central Bank buying and an improvement in the political situation brought Italian yields across the curve back below 7 percent last week but the situation remains fragile.

"In short, the market can be more confident in the ability of Greece and Italy to pass the necessary fiscal measures to regain control of their debt, but the economic and structural issues facing the euro zone remain a problem," said Credit Agricole CIB rate strategist Peter Chatwell.

December Bund futures were 11 ticks lower at 137.14 with 10-year yields up less than a basis point at 1.89 percent.

Copyright Reuters, 2011