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Italian Bonds Decline as Berlusconi Threatens Government

Italian 10-year government bonds posted their first weekly drop in four after former Premier Silvio Berlusconi threatened to withdraw his party’s support for Prime Minister Mario Monti’s coalition government.

Declines yesterday pushed the yield to the most since Nov. 28 as Berlusconi’s top political deputy called for an “orderly end” to Monti’s government, saying the administration failed to develop a strategy to halt the recession. Germany’s two-year notes advanced amid speculation the European Central Bank will cut interest rates after a report yesterday showed the country’s industrial production declined in October. Finnish and Dutch two-year yields fell below zero yesterday.

The drop in Italian bonds “gives us a good clue as to how much the market doesn’t like the idea of the politicians being back in power,” said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. There may be “a drift higher in yields,” he said.

Italian 10-year yields rose three basis points, or 0.03 percentage point, to 4.53 percent at 5 p.m. London time yesterday, after being as high as 4.65 percent. The 5.5 percent bond due November 2022 dropped 0.23, or 2.30 euros per 1,000-euro ($1,294) face amount, to 108.11.

German yields fell as three officials with knowledge of ECB deliberations said a majority of policy makers were open to a rate cut. The central bank lowered growth forecasts this week.

Negative Yields

Two-year note yields slid nine basis points to minus 0.077 percent, the first weekly drop since Nov. 16. The rate dropped to minus 0.085 percent, the least since Aug. 2, when it reached an all-time low of minus 0.097 percent. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

German 10-year yields fell nine basis points this week to 1.30 percent, after dropping to 1.28 percent, the lowest level since Aug. 3.

The outlook from the ECB “scared some market participants, and we’ve seen another leg lower in bund yields,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Yields could stay low for the next few weeks.”

A report next week may show euro-area industrial production stagnated in October, after dropping the most in more than three years in a month earlier. Output was unchanged from September, when it fell 2.5 percent, the European Union’s statistics office in Luxembourg will say on Dec. 12, according to the median prediction of 34 economists in a Bloomberg News survey.

The ECB’s decision on Dec. 6 to keep its main refinancing rate at a record-low 0.75 percent was in line with the median estimate of 61 analysts in a Bloomberg survey.

German bonds returned 4.3 percent this year through Dec. 6, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 4.7 percent and Italy’s bonds earned 20 percent.

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