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Italy’s Bonds Rise as Letta Wins Vote; Portugal Securities Slide

Italy's Prime Minister Enrico Letta pauses as he listens during a parliamentary session inside the Senate, the upper house of parliament, in Rome. Photographer: Alessia Pierdomenico/Bloomberg
Italy's Prime Minister Enrico Letta pauses as he listens during a parliamentary session inside the Senate, the upper house of parliament, in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Oct. 2 (Bloomberg) -- Italy’s government bonds rose for a second day as Prime Minister Enrico Letta won a confidence vote in parliament, avoiding the risk of sending the country to another election.

The nation’s two-year yields dropped to the lowest level in eight weeks after former premier Silvio Berlusconi backtracked on a pledge to bring down the government amid signs his party would desert him. Portuguese bonds slumped, halting a four-day advance. German bunds were little changed as the European Central Bank President Mario Draghi repeated plans to keep borrowing costs low for as long as necessary.

“Letta has managed to hold it together and keep the government in place, so obviously this is at the very least a short-term positive,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “The bigger question is now whether Berlusconi loses his status as the leader of the right, and whether we get a more stable political environment in Italy going forward. This would reduce the political risk premium” and boost Italian bonds, he said.

Italy’s 10-year yield fell five basis points, or 0.05 percentage point, to 4.37 percent at 4:47 p.m. London time. The 4.5 percent bond maturing in March 2024 rose 0.4, or 4 euros per 1,000-euro ($1,359) face amount, to 101.48. The yield dropped 15 basis points yesterday.

The two-year rate declined seven basis points to 1.69 percent after sliding to 1.66 percent, the least since Aug. 7.

Letta’s Victory

Letta was supported by 235 senators while 70 opposed him during today’s vote in Rome. As the decision approached, Berlusconi announced he would support the government, reversing an earlier pledge to oppose the prime minister.

Letta had called the confidence vote after Berlusconi pulled his ministers from the government Sept. 28. Cracks in Berlusconi’s People of Liberty party began to appear when prominent figures including party secretary Angelino Alfano said they’d vote for the government.

Portugal’s 10-year yields jumped the most in two weeks amid speculation their decline yesterday to the lowest since August was excessive

Yields may also have increased as optimism the political turmoil in Italy will be resolved prompted investors to sell the securities in favor of Italian debt, according to Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London.

Portugal’s 10-year yield jumped 18 basis points to 6.77 percent, the biggest increase since Sept. 13. It fell 47 basis points in the previous four days.

Worst Performers

The country’s bonds were the euro region’s worst-performing securities last quarter, according to Bloomberg World Bond Indexes. They fell 0.8 percent as a rift emerged in the government over budget policy and amid concern the country may need a second economic support program.

“There are rising odds that the country will need another bailout,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “Hence, investors are becoming nervous as another bailout will come with political pressure for private investors’ involvement.”

The ECB kept its main refinancing rate at a record-low 0.5 percent for a sixth month, as predicted by all 52 economists in a Bloomberg News survey.

‘Extended Period’

“The Governing Council confirms the key ECB interest rate to remain at the current or lower level for an extended period of time,” Draghi said in Paris after the decision was announced. The ECB is ready to inject more cash into the economy via new longer-term refinancing operations if required, he said.

Germany’s 10-year yield was at 1.81 percent after declining to 1.74 percent on Sept. 30, the lowest level since Aug. 13.

The German government sold 4.06 billion euros of 10-year bunds today at an average yield of 1.79 percent, compared with 2.06 percent at the previous auction on Sept. 11. Investors bid for 1.3 times the amount sold.

Spanish 10-year yields rose eight basis points to 4.25 percent before the nation sells 3.5 billion euros of bonds maturing between 2018 and 2023 tomorrow.

Italian bonds returned 4.5 percent this year through yesterday, according to the Bloomberg World Bond Indexes. Spanish securities rose 9.9 percent, while German bunds dropped 1.6 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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