Portuguese yields tumble to lowest in over a month
* Portuguese yields fall sharply after bailout review
* Italian bonds rise as political risks abate
* Italian Senate committee recommends Berlusconi expulsion
LONDON, Oct 4 (Reuters) - Portuguese bond yields fell to their lowest in more than a month on Friday one day after the country's international lenders approved its performance under a bailout in their latest review.
Portuguese bonds outperformed other peripheral bond markets which were also higher on the day.
Italian debt prices extended this week's relief rally after its government won a confidence vote in parliament and a Senate Committee recommended Silvio Berlusconi be expelled from the Senate after a tax fraud conviction.
The European Union and International Monetary Fund said Lisbon was moving to meet the lending programme's goals and that there were early signs of recovery after the worst economic downturn since the 1970s.
It rejected government requests to ease fiscal goals but the comments were considered reassuring, sending Portuguese yields sharply lower. A sharp rise in Portuguese yields during a government crisis earlier this year prompted investors to doubt the country's ability to exit its bailout as planned next year.
"The Troika came out last night and said that the plan is going roughly according to expectations, and so they got their sign-off and as a result the short-end has been flying," David Keeble, global head of fixed income strategy at Credit Agricole.
"It's not far-fetched now to expect that Portugal next year could come to the market."
Ten-year Portuguese yields fell 21 basis points to 6.43 percent - its lowest since late August, while two-year yields dropped 39 basis points to 4.94 percent. Portuguese bonds are fairly illiquid and prone to large price swings.
Italian 10-year yields were down 7 basis points at 4.31 percent, back to levels which prevailed early last week before Berlusconi's allies threatened to withdraw from the ruling left-right coalition. Spanish equivalents were 3 bps lower at 4.23 percent.
"We are seeing reduced political risk in Italy following relief that Letta survived the no-confidence vote ... We are seeing a bit of short covering in Italian bonds after the sell-off we saw at the start of the week," RIA Capital Markets strategist Nick Stamenkovic said.
A cross-party Italian Senate committee on Friday voted to recommend that centre-right leader Silvio Berlusconi be expelled from the Senate following his conviction for tax fraud in August. The proposal will have to be ratified by a vote of the full Senate which is expected within the next three weeks.
Keeble said while the recommendation did not have much of an impact on the market this session, it would be significant if ratified. Berlusconi was forced into a humiliating U-turn when rebels in his centre-right party decided to back Letta in a Senate confidence vote this week.
"By that time we had that U-turn, it was almost written on the wall that he was going to be exiting stage left quite soon," Keeble said. "It's useful not to have a guy who can bring down a government sitting in the government."
German Bunds fell 27 ticks to 139.96 but were seen range-bound as investors weighed the potential consequences of a lengthy U.S. budget standoff in the world's biggest economy.
A partial U.S. government shutdown due to the row has delayed the closely-watched U.S. jobs report, which was due on Friday. The data is a key factor in the Federal Reserve's deliberations over when to scale back its bond purchases.
Any further delays in its release could boost expectations the central bank will maintain the size of its monetary stimulus for longer than initially thought, possibly into 2014.
"Liquidity is the dominant factor as regards yield levels and spreads," Rabobank strategist Richard McGuire said.
"The U.S. shutdown on the face of it should be a very clear negative for risk appetite, but in so much as it depresses the outlook for U.S. growth, it also presents a rosier outlook as regards additional stimulus from the Fed."
Lack of progress in ending the partial U.S. government shutdown is feeding worries that lawmakers will not agree a deal to raise the debt ceiling before a mid-October deadline.
While the likelihood of an actual default is seen as slim, there are signs in the market of rising credit risk.