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Italy bond futures

depict upward trend

MILAN: Italian debt markets climbed as tentative optimism ahead of forthcoming elections brought in buyers, taking some traders by surprise.

Traders said the mood had grown more positive that April 21 elections might either bring a clear winner or that politicians would be able to find a solution to forming a government.

Behind that speculation there were also steady economic fundamentals, with the Italian economy chugging along despite recent political uncertainty, and falling inflation.

The strength of the lira against the mark, helped by the dollar's recent gains, added to interest in Italy, they said.

The June Btp future on LIFFE was 54 basis points up at 110.43 with resistance expected at 110.60 and support at 110.10 and 109.90 then 109.70.

The September 2005 Btp was 42 basis points stronger at 101.67 and the spread against the benchmark 10-year Bund closed in to 405 basis points from 411 yesterday.

Dealers said the rise was precarious as volumes were thin. "It all has a very fragile base - the closer we get to voting the more nervous the market is going to get and the spread could widen again to 420", one broker said. "It's over optimistic but if you sold the market yesterday you'd be losing money.

Earlier the Treasury auctioned 2.5 trillion lire two-year zero coupon bills (CIZ), with bids up to 7.0 trillion lire.

IRISH BONDS

DUBLIN: Irish government bonds pared their earlier gains in afternoon trade on Wednesday, falling back at Bunds and gilts began to retreat from their highs.

"We just saw a little bit of weakness creep into European markets this afternoon and that has brought the Irish market back slightly", a dealer said.

Dealers said the Irish market was looking expensive relative to British gilts.

"The front end especially is expensive compared to gilts and that will hold it back in the short term", one said. "The longer end is not so expensive in relative terms".

By 1507 GMT the eight percent bond due 2000 was at 103.30, up 10p on the day, to yield 6.68 percent. The eight percent bond due 2006 was also up 10p at 100.25, yielding 7.80 percent.

"We have been outperforming the UK recently, partly thanks to some foreign buying of the Irish market", another dealer said. "If we see that demand continue then we could be sustained at these spreads over the UK, even though they seem expensive".

SPANISH BONDS

MADRID: Spanish government bonds closed firmer but off their earlier highs, with eyes fixed firmly on German bonds after yesterday's narrowing of the differential.

The peseta was steady. Traders said they had not actually seen the Bank of Spain in the market today but there had been demand for marks at around 83.53 pesetas.

In recent days the central bank has been putting a brake on the currency's rise at 83.50/53 to the mark, they said.

Catalan leader Jordi Pujal's comments yesterday about a pact with the conservative Popular Party still being a long way off may have also put a dampener on the peseta, traders said.

The Popular Party, which won a minority victory at the March 3 general election, cannot form a government without Catalan support and negotiations have already dragged on for five weeks.

The 10-year benchmark yield differential over the equivalent bund was around 305 basis points at close, practically unchanged from Tuesday.-Reuter