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EURO GOVT-Italy pressured as reform hurdles weigh on demand
March 20, 2012 / 5:07 PM / 6 years ago

EURO GOVT-Italy pressured as reform hurdles weigh on demand

* Italy pressured as PM Monti enters labour talks
    * Focus on fiscal slippage halts selloff in Bunds
    * PMI data in focus, may spur peripheral growth worries

    By William James and Emelia Sithole-Matarise	
    LONDON, March 20 (Reuters) - Italian bonds came under
pressure on Tuesday as the prime minister met unions over labour
reforms, bringing worries about fiscal slippage in the region's
weaker states to the fore and calming a recent resurgence in
risk appetite.	
    The move away from riskier euro zone bonds helped German
Bunds to stabilise after a steep rise in yields last week,
though traders said the momentum behind a U.S.-led safe-haven
selloff could still carry yields higher in the short term.	
    Driven by the renewed focus on the difficulties of
implementing reforms, bonds issued by Spain and Italy
underperformed Germany on the day as Italian Prime Minister
Mario Monti entered crucial talks with labour unions.	
    "Labour market reforms are absolutely pivotal to improving
the medium-term growth outlook which has been very poor
recently," said RIA Capital Markets strategist Nick Stamenkovic.	
    "So if we see signs of further structural reforms going in
place that will help Italy, but if we see signs that Mr Monti
starts to water down structural reforms the market will take
that very badly and Italian bonds will come under pressure."    
  	
    Italian 10-year yields were last up 7 basis points at 4.91
percent while the equivalent Spanish yield
 was up 6.4 bps at 5.24 percent 	
    The underperformance was also fuelled by a warning shot
about Spain's fiscal outlook, which helped underscore the
long-term challenges facing the euro zone's debt-laden
sovereigns.	
    Some strategists expect Italy to keep outperforming Spain
after data showed Spanish banks' bad loan rates rose in January
to their highest since August 1994, suggesting the sector is not
yet out of the woods. 	
    "We're quite constructive still on Italy," said UBS
strategist Gianluca Ziglio. 	
    "If we get a smooth process in terms of the labour market
reform then there's no reason why BTPs shouldn't tighten even
more against Bunds and outperform Spain as well because we think
the Spanish problem is much more important and relevant than
issues in Italy."	
    	
    HIGHER GERMAN YIELDS?	
    After a choppy session, June Bund futures settled 
4 ticks higher on the day at 135.64 while the 10-year German
cash yield was flat at 2.04 percent, retreating
from this year's high of 2.07 percent reached last week.	
    Nevertheless, market participants saw scope for the Bund
yield to carve out a new range above the 2 percent barrier which
had kept a firm lid on yields this year until upbeat U.S. data
and a selloff in U.S. Treasuries forced a break of that level.	
    "My view is that we've turned in yields - two percent now
should be decent support, and then we're looking to trade the
200-day (moving average) at 2.12 percent at least and even up to
2.30. We're looking to sell any rallies," a trader said.	
    However, that outlook remained vulnerable while the euro
zone continued to demonstrate a varied economic performance
across its countries compared to the strengthening U.S. picture.	
    That threw the focus on March purchasing managers' index
data due on Thursday which could undermine the move away from
safe havens if it supports the view that growth is only strong
in the region's highly-rated countries.	
    "Even if PMI data come in a little bit stronger for the
likes of Germany, the importance of the Spanish and Italian
figures is disproportional," said Elisabeth Afseth, fixed-income
analyst at Investec.

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