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Italian Bond Yield Reaches Six-Week High Before Auction

Italy’s 10-year bonds rose for the first time in four days after comments made by an ally of former premier Silvio Berlusconi spurred optimism a split in the government coalition will be avoided.

The benchmark yield fell from a six-week high as Renato Brunetta, chief whip of Berlusconi’s People of Liberty party, said Italy will scrap part of an unpopular property tax, easing concern the issue would cause the group to leave the coalition. German bonds dropped along with U.S. Treasuries as demand for safer assets waned after the securities rallied earlier this week amid speculation America and its allies will launch a military strike on Syria.

“There seems to be a relief rebound as the comment suggested that some form of agreement was reached between Berlusconi’s and the ruling party,” said Luca Jellinek, head of European rate strategy at Credit Agricole Corporate & Investment Bank in London. “While this may help to reduce political tension for now, it doesn’t remove it.”

Italy’s 10-year yield fell four basis points, or 0.04 percentage point, to 4.41 percent at the 5 p.m. close of trading in London after climbing to 4.48 percent, the highest level since July 18. The 4.5 percent bond due May 2023 rose 0.32, or 3.20 euros per 1,000-euro ($1,332) face amount, to 101.055.

Cabinet Meeting

The cabinet of Italian Prime Minister Enrico Letta is meeting in Rome to discuss the property tax that was imposed last year as an emergency austerity measure. Berlusconi wants to scrap the bulk of the levy and may retaliate if he feels Letta’s cuts don’t go far enough.

Berlusconi was convicted of fraud linked to tax evasion in the purchase of U.S. film rights for his broadcast company Mediaset SpA. His People of Liberty party threatened to withdraw its support if Letta’s Democratic Party votes to end his mandate as a senator.

“We all know that there have been political challenges in Italy and I trust that the political leaders try to ensure political stability,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in an interview in Brussels. “It’s important for economic stability and recovery.”

Italy sold 8.5 billion euros of six-month bills today at an average yield of 0.886 percent, up from 0.799 percent at the prior auction on July 29. The Treasury will offer as much as 6 billion euros of debt due in December 2018 and March 2024 tomorrow, the first auction of conventional bonds since July.

Spanish Bonds

Spain’s 10-year yield climbed four basis points to 4.53 percent after rising to 4.58 percent on Aug. 22, the highest level since Aug. 7.

The extra yield on Spain’s 10-year bonds over similar-maturity Italian securities expanded eight basis points to 12 basis points after shrinking to three basis points yesterday, the narrowest since March 2012.

The U.S. and its allies are moving closer to a military strike against Syria in response to an alleged chemical weapons attack near Damascus last week. President Barack Obama plans to release an intelligence assessment this week and U.K. Prime Minister David Cameron said Britain will put forward a draft resolution at the United Nations today authorizing action to protect civilians.

German 10-year bund yields climbed three basis points to 1.88 percent after dropping nine basis points during the previous two days.

Bunds declined even after Gfk SE (GFK) said a gauge of German consumer sentiment, based on a survey of about 2,000 people, will fall to 6.9 in September from 7 this month, spurring demand for safer investments.

Finland Sale

Finland sold 4 billion euros of notes maturing in 2018 through banks today, with 80 percent of the sale allocated to overseas investors. The security was priced to yield 16 basis points below the benchmark mid-swap rate.

Volatility in Greek bonds was the highest in euro-area markets followed by those of Finland and Germany, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Italian bonds returned 3.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s rose 7.6 percent, while Germany’s declined 2.1 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Morgane Lapeyre in London at mlapeyre@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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