Italian Notes Slide Before Election; Bunds Gain on Haven Demand

Italian notes dropped for the fifth week in six weeks amid speculation parliamentary elections will result in a hung parliament, derailing economic reforms in Europe’s biggest debt market.

The country’s two-year yields climbed toward the highest level since the start of January as the latest polls before the vote tomorrow and Monday showed front-runner Pier Luigi Bersani is unlikely to gain enough seats to govern without a coalition. Former Premier Silvio Berlusconi was in second place. German bonds rallied this week, with yields dropping this most since December, as a euro-area report showing manufacturing and services shrank boosted demand for the region’s safest assets.

“There’s been a selloff in Italian assets ahead of the election,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “The consensus expectation is for a market-friendly result but there’s some uncertainty and investors are a bit scared that Berlusconi could come back in. People just want it to be out of the way.”

Italy’s two-year yield climbed nine basis points, or 0.09 percentage point, this week to 1.67 percent. The 6 percent note due in November 2014 dropped 0.235, or 2.35 euros per 1,000-euro ($1,316) face amount, to 107.29. The yield climbed to 1.77 percent on Feb. 5, the highest level since Jan. 3.

Bersani had 33.8 percent support in an SWG Institute survey published Feb. 8, when a two-week poll blackout began, down 1.1 percentage points from Jan. 9. Berlusconi, who favors a tax amnesty, gained 2.5 percentage points to 27.8 percent. Current Prime Minister Mario Monti, whose austerity measures have calmed the nation’s debt crisis, was fourth with 13.4 percent.

Voting Ends

Voting ends on Feb. 25, the same day Italy is scheduled to auction as much as 3 billion euros of zero-coupon notes along with inflation-linked bonds due in 2021 and 2026. Two-year yields have dropped almost 6.5 percentage points since reaching a euro-era record high of 8.12 percent in November 2011, the month Monti replaced Berlusconi.

German bunds led gains among the euro area’s so-called core government securities this week as the European Commission yesterday forecast the region’s economy will shrink for a second year in 2013.

A composite index of factory and services output in the 17-nation bloc fell to 47.3 from 48.6 in January, Markit Economics said Feb. 21. A reading below 50 indicates contraction.

German 10-year yields fell eight basis points this week to 1.57 percent, the biggest decline since the period ended Dec. 7. Similar-maturity Dutch yields dropped eight basis points this week to 1.80 percent, and Austria’s declined seven basis points to 1.91 percent.

Italian bonds handed investors a loss of 0.9 percent this month through Feb. 21, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.6 percent and Austria’s returned 0.3 percent.

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