Italian Political Deadlock Ends ECB-Fueled Bond Gain

Italy’s government bonds fell for the first quarter since June as a political deadlock and concern financial turmoil in Cyprus will spread sapped demand for the nation’s securities.

Greek bonds also dropped in the past three months as European Union attempts to impose a levy on Cypriot bank deposits as a condition of a bailout ignited speculation similar rules will be applied elsewhere. The extra yield investors demand to hold Italy’s 10-year securities instead of German bunds reached the widest this year this week as lawmakers struggled to form a government a month after inconclusive elections. German bonds gained for an eighth quarter.

“Market participants were very disappointed that there was no clear election result,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “There won’t be a stable government in the next few weeks and is still a lot of uncertainty. The latest spread widening all across the market rattled through because of Cyprus. That also drove spreads in Italian bonds higher.”

Italian President Giorgio Napolitano took over the search for the next Prime Minister yesterday after Pier Luigi Bersani failed to assemble a majority in the divided parliament.

Italy’s 10-year yield climbed 27 basis points, or 0.27 percentage point, this quarter to 4.76 percent after falling to 4.07 percent on Jan. 25, the lowest level since November 2010. The 5.5 percent bond due November 2022 dropped 2.15, or 21.50 euros per 1,000-euro ($1,281) face amount, to 106.045.

The yield had declined 132 basis points in the previous six months as European Central Bank President Mario Draghi pledged in July to do whatever it takes to preserve the single currency.

Bersani Rejected

Italy has been awaiting a new government since elections on Feb. 24-25 failed to give any single party a majority in both houses of parliament.

Bersani, head of the Democratic Party that won the most seats in the lower house, met other lawmakers this week as he struggled to gain enough support to form a government. His proposal of an alliance was rejected by Beppe Grillo’s Five Star Movement on March 27, while talks with Silvio Berlusconi’s People of Liberty also failed to produce an agreement.

The additional yield investors demand to hold Italian 10-year bonds over equivalent maturity bunds widened 29 basis points this quarter to 347 basis points. The spread expanded to 361 basis points yesterday, the most since Dec. 10.

Political Upheaval

Cyprus’s banks opened for the first time in almost two weeks yesterday with new rules curbing access to cash preventing an initial panic to withdraw deposits. Lenders had been shut since March 16 when the EU presented a proposal to force losses on depositors in exchange for a 10 billion-euro bailout. That plan touched off political upheaval and sapped demand for bonds in Italy, Spain and other so-called peripheral nations.

Greek 10-year yields climbed 54 basis points this quarter to 12.44 percent after tumbling almost 14 percentage points in the previous six months.

Spanish bonds rose in the past three months, with 10-year rates falling 21 basis points to 5.06 percent. The yield dropped to 4.70 percent on March 12, the lowest since November 2010.

Germany’s 10-year bunds have gained every quarter since March 2011 as a failure to contain the European debt crisis and record low ECB interest rates underpinned demand for the region’s safest assets.

Retail Sales

The nation’s 10-year yields declined three basis points in the past three months to 1.29 percent after dropping to 1.25 percent yesterday, the lowest level since Aug. 3.

Italian industrial orders and retail sales both declined in January, reports showed this week.

“The Italian economy isn’t performing well at the moment,” DZ Bank’s Reicherter said. “They have to come up with several reforms but with no government in position that’s still an uncertainty for the entire euro zone, so we still see further demand for bunds.”

Italian government bonds lost 0.3 percent this year through March 27, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 2.9 percent, and Germany’s gained 0.5 percent.

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