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Italian Bonds Advance Amid Political Optimism as Letta Wins Vote

Italian government bonds rose this week, with two-year yields reaching a two-month low, on optimism the nation’s political situation has stabilized after Prime Minister Enrico Letta won a confidence vote in parliament.

Italy’s 10-year securities climbed as former premier Silvio Berlusconi backtracked on a pledge to bring down the coalition amid signs his party would desert him. Spanish debt also gained. Benchmark Portuguese 10-year yields fell the most since July as the nation passed the eighth and ninth reviews of its aid plan. German bunds fell as European Central Bank President Mario Draghi refrained from signaling that additional measures were needed to boost the region’s recovery.

“Peripheral bonds have breathed a sigh of relief that Letta survived a no-confidence vote,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Reduced political uncertainty in Italy should help to stabilize bonds near-term, while disappointment that the ECB failed to signal an imminent LTRO has weighed on bunds,” he said, referring to the central bank’s Longer-Term Refinancing Operations.

Italy’s 10-year yield fell 26 basis points in the week, or 0.26 percentage point, to 4.30 percent at 4:59 p.m. London time yesterday. The 4.5 percent bond due in March 2024 rose 2.15, or 21.50 euros per 1,000-euro ($1,359) face amount, to 102.055. Two-year yields fell 25 basis points to 1.64 percent after dropping to 1.63 percent yesterday, the lowest level since Aug. 7.

Berlusconi’s Future

Letta’s five-month-old coalition won support from 235 of the Senate’s 321 lawmakers on Oct. 2. Berlusconi’s future in politics hangs in the balance today after a senate panel recommended his expulsion from the upper house following an August tax-fraud conviction. The matter will now be put before the Senate for a final vote.

The Portuguese government raised its 2014 growth forecast to 0.8 percent from 0.6 percent, while keeping its deficit targets unchanged as it attempts to exit its bailout program. Portugal is trying to regain full access to debt markets with the end of the 78 billion-euro rescue plan approaching in June 2014.

The yield on Portugal’s 10-year bonds slipped 44 basis points in the week to 6.4 percent, the biggest drop since the five-day period ended July 19. The rate on similar-maturity Spanish bonds fell 16 basis points in the week to 4.21 percent.

The benchmark 10-year bund yield rose six basis points in the week to 1.84 percent.

Italian industrial production rose 0.7 percent in August after a 1.1 percent decline in July, according to the median of economist estimates in a Bloomberg News survey before the data next week. An Oct. 7 report is forecast to show euro-area investor confidence improved this month. Italy is scheduled to sell bonds on Oct. 11.

Italian bonds returned 4.7 percent this year through Oct. 3, according to Bloomberg World Bond Indexes. Spain’s rose 9.5 percent and Germany’s advanced 1.6 percent.

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