Tue Feb 12, 2013 4:48am EST
* Italy, Spanish bonds supported by domestic buying
* Recovery seen short-lived as political concerns persist
* Focus on ECB's Draghi when he speaks in Spain
By Emelia Sithole-Matarise
LONDON, Feb 12 (Reuters) - Spanish and Italian bonds inched up on Tuesday as some domestic buyers took advantage of a recent sell-off, but the recovery looked fragile given political uncertainty in both countries.
Trade in the two periphery nations' paper has been choppy over the past week as Spanish Prime Minister Mariano Rajoy faces calls to resign over a corruption scandal while in Italy, ex-premier Silvio Berlusconi's comeback in polls less than two weeks before elections is unsettling investors.
Spanish 10-year yields fell 6 basis points on the day to 5.38 percent, having risen to a seven-week high around 5.55 percent last week as Madrid fought to shake off the scandal, in which Rajoy denies wrongdoing.
"Some domestics are buying after the sell-off but not much. We have Draghi speaking in Spain and that might be interesting but we might see another leg down, especially in (Italian) BTPs with supply tomorrow," a trader said.
European Central Bank President Mario Draghi is due to address Spanish lawmakers later on Tuesday to explain and defend the ECB's current monetary policy strategy against a backdrop of heightened concerns about the strong euro. Draghi is also expected to meet Rajoy, but the market does not expect them to discuss a potential aid request by Madrid that could trigger the ECB's bond purchase scheme.
Italian bonds underperformed their Spanish equivalents, with 10-year BTPs yielding 3 bps less on the day at 4.58 percent .
That underperformance, not only against Spanish but also against Irish debt, is expected to be exacerbated going into Italy's sale of up to 5.25 billion euros of bonds on Wednesday where borrowing costs are expected to rise on election jitters even though redemptions will likely ensure ample demand.
"There will be some focus on Italian auctions tomorrow to see how that goes as the elections near. Yields have gone up a little bit and that will be reflected in the auctions but we expect them to get the bonds away," said Lyn Graham-Taylor, a strategist at Rabobank.
Spanish short-term auction yields were little changed on Tuesday at a sale of 6- and 12-month bills.
IRISH GAINS
Reflecting the defensive posture some analysts are adopting on Italy, Unicredit strategists saw scope for further gains in favouring Irish debt, which rallied sharply last week after Ireland concluded a bank debt deal that will reduce its borrowing costs for the next decade.
They moved their "buy' stance on Irish 2018 bonds against Italy to a spread target of -50 bps from -30bps.
"The reason for shifting out the target is to let the profit run and be in the position of capturing the current positive momentum as well as a possible overshooting of markets sentiment both in positive terms versus Ireland and in negative terms versus Italy," they said in a note.
At the euro zone's core, German Bund futures were last 3 ticks up on the day at 142.88. The contract has struggled to decisively break above 143.00 for two consecutive sessions which technical analysts say could pave the way to 143.15, the 200-day moving average which would herald further gains.
Earlier news of a nuclear test by North Korea had no apparent impact on the market.
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