Italian Bonds Decline Before Sales as Berlusconi Allies Mobilize

Italy’s 10-year government bonds fell for the first time in nine days before the country auctions as much as 6 billion euros ($8.1 billion) of debt tomorrow.

Ten-year yields jumped by the most in three weeks on concern the coalition government will collapse after former Premier Silvio Berlusconi’s allies threatened to step down if he is expelled from the Senate as a result of his conviction for tax fraud. German bund yields dropped to a six-week low as European Central Bank Executive Board member Joerg Asmussen said central bank policy will remain expansive for as long as needed.

“We have supply tomorrow from Italy so there may be some pressure on Italian bonds,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The market is monitoring closely any statements from central bankers about new stimulus.”

Italy’s 10-year yield climbed 10 basis points, or 0.1 percentage point, to 4.33 percent at 4:26 p.m. London time, the biggest increase since Sept. 5. The 4.5 percent bond maturing May 2023 fell 0.74, or 7.40 euros per 1,000-euro face amount, to 101.635. Yields on the nation’s two-year notes jumped seven basis points to 1.80 percent.

The rate on Spanish 10-year securities increased six basis points to 4.34 percent.

“There may be the possibility that if Berlusconi is expelled, we all declare ourselves expelled,” lawmaker Fabrizio Cicchitto told reporters after discussions yesterday with colleagues in the People of Liberty Party, or the PDL.

Political Standoff

The standoff threatens to split Prime Minister Enrico Letta’s ruling coalition, which depends on the former premier’s lawmakers for support.

The move by Berlusconi’s allies builds on his threat in August to bring down the government. Letta’s Democratic Party, the largest group in parliament, has said the expulsion is required by law.

Italian President Giorgio Napolitano said in an e-mailed statement today that the threat by the PDL lawmakers was an unsettling development, adding that he hoped they would express their solidarity for Berlusconi in another way. The conviction was “not a coup,” he said.

Italy allotted 8.5 billion euros of six-month bills at an average yield of 0.781 percent today.

The nation last sold debt maturing in March 2024 on Aug. 29 at 4.46 percent. The Rome-based Treasury plans to auction as much as three billion euros of the 2024 securities tomorrow, as well as up to three billion euros of five-year notes.

Auction Concession

“There’s a bit of a concession ahead of tomorrow’s auction which should help supply be taken down reasonably,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The overarching theme is one where the market is not sure what the political outlook in Italy is. The markets are very wary of Italian bonds.”

Benchmark German bunds headed for a second weekly gain after ECB President Mario Draghi said on Sept. 23 that policy makers are ready to pump more cash into the banking system to stop borrowing costs from rising. Asmussen said in Berlin today that there’s no inflation pressure in the region. The Frankfurt-based central bank next decides on monetary policy on Oct. 2.

Volatility on Italian bonds was the highest in euro-area markets today, followed by Spain and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Germany’s 10-year bund yield was little changed at 1.83 percent after falling to 1.81 percent, the lowest since Aug. 15.

Italian bonds returned 4.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds lost 1.7 percent, while Spain’s gained 9.2 percent.

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