Italian Bonds Fall as Government Support Dwindles; Bunds Rise

Italian bonds fell, pushing 10-year yields up by the most in four months, as former Prime Minister Silvio Berlusconi threatened to stop supporting the government, risking the disintegration of the parliamentary coalition.

The nation’s securities dropped for a second day as Prime Minister Mario Monti survived a confidence vote after the head of Berlusconi’s People of Liberty party in the Senate said his group wouldn’t put the full weight of its support behind an economic stimulus bill. German 10-year yields dropped to the lowest in four months after European Central Bank President Mario Draghi said there was a “wide discussion” on interest rates before a policy decision today.

“Political risk has clearly increased in Italy today, even though Monti survived,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “That’s undermined peripheral bonds, particularly Italy, and given a little bit of support to bunds.”

Italian 10-year yields jumped 13 basis points, or 0.13 percentage point, to 4.58 percent at 4:50 p.m. London time, after climbing as much as 18 basis points, the most since Aug. 2. The 5.5 percent bond due November 2022 fell 1.075, or 10.75 euros per 1,000-euro ($1,297) face amount, to 107.665.

Two-year note yields added 12 basis points to 2.04 percent, after rising to 2.16 percent, the highest level since Nov. 21.

Monti’s Vote

Berlusconi’s People of Liberty party will take a “position of abstention” regarding the government, according to Maurizio Gasparri, head of the party in the Senate. The decision by the PDL came about 12 hours after Berlusconi criticized the government and said he may run in elections due within months.

Italian 10-year yields climbed to a euro-era record of 7.48 percent in November 2011 as Berlusconi’s government unraveled to be replaced by an administration of technocrats led by Monti, a former European Union competition commissioner and economics professor.

German bunds rose as Draghi’s comments boosted speculation of interest-rate cuts. The 10-year yield fell five basis points to 1.30 percent after reaching 1.29 percent, the lowest since Aug. 3. Two-year note yields dropped five basis points to minus 0.05 percent, after declining as much as six basis points, the most since July 30.

A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

The ECB kept its main refinancing rate at an all-time low of 0.75 percent today, in line with the median estimate of 61 analysts in a Bloomberg News survey.

“Weak activity is expected to continue into next year,” Draghi said at a press conference in Frankfurt after the decision. The ECB last cut rates in July.

‘Downbeat Expectations’

“The combination of this comment and very downbeat ECB projections will obviously keep rate-cut speculation alive,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. The speculation “is feeding through across the yield curve” and boosting German debt securities.

A report earlier today confirmed the euro-area economy was pushed into a recession for the second time in four years.

Gross domestic product in the 17-nation currency bloc slipped 0.1 percent in the third quarter from the previous three months, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today, confirming an initial estimate published on Nov. 15.

French Yields

French 10-year bond yields dropped to a record as borrowing costs fell at an auction of securities due between 2018 and 2027.

France allotted 3.97 billion euros of government debt, completing its 2012 issuance plan. It sold 900 million euros of benchmark 15-year bonds at an all-time low average yield of 2.56 percent, down from 2.85 percent on Sept. 6, the previous record.

The French 10-year yield was little changed at 1.99 percent, after falling to 1.986 percent. Austrian 10-year rates were at 1.73 percent, after slipping to 1.727 percent, the lowest since the euro’s debut in 1999. Belgian 10-year yields fell to a record 2.12 percent.

Volatility on Irish bonds was the highest in euro-region markets, followed by those of Italy and Spain, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit default swaps.

German bonds returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 4.9 percent and Italy’s bonds made 20 percent.

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