Wed Sep 11, 2013 6:03am EDT
* Italian lawmakers delay showdown over Berlusconi
* German yields flirt near 1-1/2 year highs
* Germany to sell 5 billion euros of 10-year Bunds
By Emelia Sithole-Matarise
LONDON, Sept 11 (Reuters) - Italy's 10-year yield premium rose further above that of Spain on Wednesday as investors fretted about the future of Rome's fragile ruling coalition and plans by the country to issue more debt this year.
Lawmakers held fire on Tuesday on a vote on whether to expel Silvio Berlusconi from the Senate following his conviction for tax fraud after allies of the former premier threatened to topple the government. Debate resumes on Thursday.
Concern about the survival of Rome's government has weighed on Italian bonds, pushing their 10-year yields above those of Spain for the first time in 18 months.
Italian 10-year yields were unchanged on the day at 4.55 percent while Spanish equivalents were down 1 basis point at 4.52 percent, widening the spread to 3 bps from 1 basis point in late Tuesday trade.
The Italian Treasury has asked to raise the ceiling on this year's net debt issuance by 18 billion to 98 billion euros, highlighting the difficulty Rome is having in reining in the public finances and putting more pressure on it to float good volumes at upcoming auctions.
The higher issuance will lift Italy's massive public debt, already targeted at 130 percent of output this year, the second highest in the euro zone after Greece.
In contrast, Spain is reducing the size of its auctions for the rest of the year, after frontloading most debt sales earlier this year to take advantage of benign market conditions for lower-rated debt.
"They postponed the vote but it does not change anything much. As long as the situation with Berlusconi isn't cleared out and the political threat to the government remains you shouldn't expect Italy to reverse its underperformance of Spain," KBC strategist Mathias van der Jeugt said.
ITALY AUCTION TEST
Some in the market expected the gap with Spain to widen further ahead of a sale on Thursday of up to 7.5 billion euros of Italian debt, although demand from Italy's huge domestic financial sector should support the auction.
In core bonds, German 10-year yields dipped, with the market taking a breather after Tuesday's selloff. They were still near 1-1/2 year highs before the sale of new 10-year bonds later in the session.
Some in the market said the auction could be weakened by a reduction in the chances of a near-term military strike on Syria, which has cooled demand for low-risk debt.
Last week an auction of 5-year German debt drew softer demand than at a previous sale in August as improving euro zone and U.S. economic data and expectations the U.S. Federal Reserve would go ahead with a cutback in its monetary stimulus soured investor appetite for top-rated bonds.
"The higher yield might attract some extra demand but I think it will be a relatively tough auction given the economic backdrop," one trader said, "Average demand at previous Bund sales this year have been around 1.5 so we might see it come below this."
Bund futures were 14 ticks up at 136.87 with cash 10-year yields 1.3 bps lower at 2.03 percent, within sight of the 2.059 percent hits last week.
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