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Italian Bonds Decline as Polls Indicate Hung Parliament

Leader of Italy's Democratic Party Pier Luigi Bersani
Pier Luigi Bersani will probably gain a majority in the 630-seat lower house, according to polls published Feb. 8. Photographer: Alessia Pierdomenico/Bloomberg

Italy’s bonds fell, erasing an advance that saw 10-year yields decline by the most in six months, as polls indicated the euro area’s third-largest economy may be left with a hung parliament.

Italian two-year yields reversed the biggest slide in six weeks as partial results of the country’s election suggested former Prime Minister Silvio Berlusconi may have built a blocking minority in the Senate to deny outright victory to Pier Luigi Bersani. Stefano Fassina, an aide to Bersani, said the nation may need a second election. German bunds rose as concern the results will derail austerity measures introduced by outgoing premier Mario Monti boosted demand for safer assets.

“The lower house is probably going to end in the center-left but the senate is a close call and what we are seeing in the latest polls is that Berlusconi is doing better,” said Nicola Marinelli, who oversees $180 million at Glendevon King Asset Management in London. “With no one having a majority there is going to be a lot of negotiations and it is not going to be a stable and strong government. When the first exit polls came out, Italian bonds pushed higher, but with the latest numbers everything is reversing rapidly.”

Italy’s 10-year yield rose four basis points, or 0.04 percentage point, to 4.49 percent as of 5 p.m. London time, after falling as much as 28 basis points, the most since Aug. 3. The 5.5 percent bond due in November 2022 declined 0.355, or 3.55 euros per 1,000-euro ($1,316) face amount, to 108.245.

Steepest Slide

The rate on nation’s two-year note climbed four basis points to 1.71 percent, after declining 14 basis points, the steepest intraday slide since Jan. 10. Still, the yield has fallen from a euro-era high of 8.12 percent in November 2011, the month Monti was appointed to replace Berlusconi as unelected leader to push through austerity measures.

Berlusconi may have won the Senate race in the key swing regions of Sicily, Campania and Lombardy, according to an IPR projection based on partial vote counts released by polling stations.

That contrasts with an instant poll published earlier by SkyTG24 Tecne that gave Sicily and Campania and a possible majority in the Senate to Bersani. The poll said Lombardy was too close to call.

The Rome-based Treasury today sold 2.82 billion euros of zero-coupon notes maturing in December 2014 at an average yield of 1.68 percent, up from 1.43 percent at a previous auction on Jan. 28. Investors bid for 1.65 times the amount of securities allotted, compared with a bid-to-cover ratio of 1.45 last month.

Bunds Gain

German 10-year yields fell one basis point to 1.56 percent, after dropping to 1.55 percent, the least since Jan. 24.

Germany sold 1.94 billion euros of 12-month securities at an average yield of 0.035 percent today. France auctioned 7.5 billion euros of three-, six- and 12-month bills.

Italian government bonds handed investors a return of 11 percent in the past year through Feb. 22, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 6.3 percent, while German bunds rose 3.5 percent, the indexes show.

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

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