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Italian Government Bonds Drop on Political Tensions; Bunds Rise

Italian bonds dropped, with 10-year yields posting the biggest weekly increase in more than a month, as political tension that threatened the survival of the coalition government deterred buyers.

Price declines yesterday pushed the yield to the highest level since Sept. 17. Former premier Silvio Berlusconi’s allies this week threatened to step down from the coalition if he is expelled from the Senate after his conviction for tax fraud. German bund yields fell by the most since July 2012 as European Central Bank officials signaled that monetary policy will stay expansionary to support the recovery.

“There has been a distinct drift” in Italian bonds, said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “On the other hand, there is still a huge amount of domestic money in Italy that will support the market, obviously at a price.”

Italy’s 10-year yield climbed 13 basis points, or 0.13 percentage point, this week to 4.42 percent at 5 p.m. London time yesterday, the biggest increase since the period ended Aug. 23. The 4.5 percent bond maturing in May 2023 fell 0.995, or 9.95 euros per 1,000-euro ($1,354) face amount, to 101.01.

Italian bonds have dropped this week as People of Liberty lawmakers led by Berlusconi threatened to resign en masse if the former premier’s tax-fraud conviction leads the Senate to oust him. Prime Minister Enrico Letta’s Democratic Party, the largest group in parliament, has said the expulsion is required under a law passed last year.

Bunds Gain

Germany’s 10-year bund yield fell 17 basis points this week to 1.78 percent, the steepest decline since the period ended July 6, 2012. The rate declined to 1.77 percent yesterday, the lowest since Aug. 13. Yields on Dutch (GNTH10YR) 10-year securities dropped 13 basis points to 2.18 percent, the biggest slide since the week ended July 12.

ECB President Mario Draghi said on Sept. 23 that officials may consider pumping more cash into the banking system if required to stop borrowing costs from rising. ECB Executive Board member Joerg Asmussen said on Sept. 26 that policy will remain expansive.

The ECB will keep its benchmark interest rate at a record-low 0.5 percent on Oct. 2, according to the median forecast of economists in a Bloomberg survey.

Germany is scheduled to auction 5 billion euros of 10-year bunds on Oct. 2. The nation last sold the benchmark securities on Sept. 11 at an average yield of 2.06 percent, the highest since October 2011. France and Spain are due to sell government debt on Oct. 3.

Italian bonds returned 4.1 percent this year through Sept. 26, according to Bloomberg World Bond Indexes. Spain’s gained 8.9 percent, while German securities lost 1.7 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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