By Emelia Sithole-Matarise
LONDON, Oct 8 (Reuters) - Spanish and Italian bond yields rose on Tuesday along with almost all other European sovereigns, as the U.S. budget stalemate and looming debt deadline continued to weigh on bond markets worldwide.
Plans in both Rome and Madrid to sell bonds via syndication also put their debt under pressure, halting the recent relief rally following last week's confidence vote in Italy for Enrico Letta's government.
Italy plans to issue its first ever seven-year bond on Wednesday, and Spain will also offer investors the first chance to get 30-year paper since 2009.
Spanish 10-year yields ended up 10 basis points at 4.31 percent while their Italian equivalents were 6 bps higher at 4.35 percent.
Portuguese yields were the only ones in the euro zone to nudge lower, helped after the Bank of Portugal revised its 2013 economic outlook to forecast a more moderate contraction.
Yields have been falling since last Friday, after Lisbon's international lenders gave a positive appraisal of the progress it has made under its bailout, but the rally has been losing steam on the U.S. political situation.
'Market action was mainly driven by the announcements of Italy and Spain, and their curves are showing a clear response to that,' said UniCredit rate strategist Luca Cazzulani.
'Portugal moved in the other direction because investors are continuing to price in a positive outcome from the recent Troika review,' he added.
Overall, however, the market remained focused on developments in the United States where the partial government shutdown entered a second week, with concerns growing about the implications of the standoff in the world's biggest economy.
European equities fell the most in five weeks as investors fretted that Republicans and Democrats will not reach agreement on the budget or on raising the debt ceiling ahead of an Oct. 17 deadline, which could result in a debt default.
'Everyone agrees that we will get some agreement given the catastrophic consequences if we don't. But equally people are quite convinced that it will take until the 11th hour to get there,' said Commerzbank strategist Michael Leister.
'In the meantime we have uncertainty and risk aversion creeping back into the market ... Peripherals have cooled down after the rally last week as the willingness or appetite to take on risk is rather limited.'
Many U.S. economic data releases, including the closely watched monthly payrolls report, scheduled for Friday, have been delayed by the government shutdown, leaving investors focused on the political developments in Washington.
Most market participants see the United States as unlikely to miss payments on its debt because a default would have severe consequences, disrupting short-term funding and potentially sharply raising the country's borrowing costs.
DOWN TO THE WIRE
'We still think that there will be a resolution and ultimately core yields will move higher, but at the moment, with the uncertainty, if it gets dragged down to the wire, that points to riskier assets continuing under pressure,' said Alan McQuaid, chief economist at Merrion Stockbrokers.
In core euro zone debt, German Bunds retreated with UK gilts after data showed more evidence of a recovery in Britain's economy and housing market, and as the market absorbed top-rated debt supply from the Netherlands.
The Bund future ended down 9 ticks on the day at 140.22 with German 10-year yields 1 bps higher at 1.81 percent. In the absence of a breakthrough in Washington, market participants expect the German yields to oscillate around the 1.72-1.85 range they have traded in over the past week.
'We're just stuck in a political mire and there's no conviction to the market,' said Nick Stamenkovic, a strategist at RIA Capital Markets. 'Treasuries and Bunds remain rangebound and I don't see that changing until we see some shift in the fiscal environment in the United States.'
(Additional reporting by Marc Jones; Editing by Catherine Evans) Keywords: MARKETS BONDS/EURO
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