EURO GOVT-Bunds rally, euro zone periphery pressed again

* Bunds rise as periphery comes under renewed pressure

* Portugal, Ireland lead sell-off

* Italy to sell up to 7.5 bln euros of bonds

By Kirsten Donovan

LONDON, Oct 28 (BestGrowthStock) – German government bonds rose on
Thursday, finding some support from stronger U.S. Treasuries and
a further sell-off in peripheral euro zone debt, led by
Portuguese and Irish bonds.

Bunds were recovering after sharp selling this week due to
traders reassessing the scale of possible U.S. quantitative
easing, and a lowering of expectations for further asset
purchases by the Bank of England.

That pushed 10-year yields through the key 2.5 percent
psychological support level and 30-year yields through 3
percent, but with troubled peripheral issuers coming under more
pressure, core debt finally found some support.

Portuguese and Irish bonds led the underperformance, with
10-year yield spreads around 20 and 30 bps wider respectively.

Government talks with the opposition collapsed in Lisbon on
Wednesday, leaving the fate of a crucial austerity budget for
next year in the balance. There were also signs Ireland is
preparing to cut public spending even further and worries that
may simply hurt growth and leave it in as deep a hole.

“It’s still the domestic policy issue which is a major
burden for Portuguese government bonds,” said David Schnautz, a
strategist at Commerzbank.

“The announcement of the stalemate in the politics obviously
left a very bad taste for those who participated in
(yesterday’s Portuguese) auction, so there’s some kind of
hangover from bad timing.”

MORE PAIN FOR GREEKS

Peripheral debt was also knocked on Wednesday by an upward
revision in Greece’s budget deficit figures.

Ten-year Greek bond yields (DE10YT=TWEB: ) were just over 10.5
percent, having risen almost 70 bps on Wednesday, with 2-year
yields around 9 percent after climbing over one percentage point
the previous day.

At 0755 GMT, December Bund futures (FGBLc1: ) were 18 ticks
higher at 128.98, having hit their lowest in nearly two months
on Wednesday.

UBS technical analyst Richard Adcock said although Bunds may
show some short-term recovery, any upside would likely be
limited and a break below Wednesday’s 128.52 low could open the
door for a move to 127.26.

Two-year bond yields (DE2YT=TWEB: ) were 1.7 bps lower at
1.003 percent with 10-year yields (DE10YT=TWEB: ) down a similar
amount at 2.548 percent.

“From the technical side, it’s looking rather bearish but we
should find some support from overseas – Treasuries and the
periphery, Greece was a very broken market yesterday,” said a
trader.

The latest Reuters survey showed most leading economists
expect the Federal Reserve to buy between $80 billion and $100
billion worth of assets per month, with estimates for how much
it will eventually spend varying from $250 billion to $2
trillion.

But Treasuries got a lift from bargain hunters stepping in
after a drop in yields on those uncertainties and a mediocre
5-year auction [US/].

In supply, Italy will auction a new three-year BTP and also
sell ten-year bonds, totalling up to 7.25 billion euros.

“Grey market levels for the new Italian 3-year benchmark
indicated a pricing at around flat in asset swap terms versus
the December 13 BTP, which we consider as rather cheapish on the
Italian curve,” said Commerzbank strategist Marcel Bross.

With short-end Italian bonds recently cheapening against
their Spanish equivalents, the bank suggest switching from
three-year Spanish bonds into BTPs.

(Editing by Patrick Graham)

EURO GOVT-Bunds rally, euro zone periphery pressed again