Italian Bonds Trim Drop Amid Speculation Letta Can Survive Vote

Italy’s 10-year bonds pared a third day of losses amid speculation Prime Minister Enrico Letta can survive a confidence vote following Silvio Berlusconi’s withdrawal of support for his administration.

The yield on the securities dropped from the highest level in more than three months as Reuters reported as many as 20 senators were prepared to leave Berlusconi’s People of Liberty party if he doesn’t back down. The bonds earlier slumped as Letta defied the former premier’s attempt to force new elections, saying he would request the vote for Oct. 2. German 10-year bonds declined.

“It seems as though there’s a chance that Berlusconi has maybe overstepped on this one,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “There’s been some rumors that his party is moving against him if he doesn’t back down. There’s been a reassessment of the politics on the ground and a view that Letta may be able to pass this confidence vote. That’s why we’ve seen a rebound.”

Italy’s 10-year yield climbed one basis point, or 0.01 percentage point, to 4.43 percent at 4:54 p.m. London time after touching 4.66 percent, the highest level since June 27. The rate reached a euro-era record 7.48 percent in November 2011. The 4.5 percent bond maturing in May 2023 fell 0.105, or 1.05 euros per 1,000-euro ($1,354) face amount, to 100.905.

Letta needs 24 votes in the Senate to secure a new majority without Berlusconi, Corriere Della Sera reported. To do so, the 47-year-old premier must win over opposition lawmakers or get members of Berlusconi’s party to abandon their leader.

Snap Elections

Letta’s plan to appeal to lawmakers won an endorsement yesterday from President Giorgio Napolitano, who is responsible for calling snap elections if parliament is deadlocked.

“In the end it’s all up to the PDL,” Letta said late yesterday in an interview televised on state-broadcaster RAI. “I think there’s a deep debate taking place within the PDL.”

German bonds were little changed as the U.S. Congress sought to end a budget stalemate that raises the risk of the first government shutdown in 17 years and threatens talks to increase the debt limit.

Failure to approve funding to keep the government open and to raise the debt ceiling would have a destabilizing effect on the economy, President Barack Obama said in a televised statement on Sept. 27. Closing the government would cut fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, according to economists from Moody’s Analytics Inc. to Economic Outlook Group LLC.

The 10-year German bund yielded 1.78 percent after touching 1.74 percent, the lowest level since Aug. 13. The rate declined 17 basis points last week, the most since July 2012.

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

Italian bonds returned 3.7 percent this year through Sept. 27, according to Bloomberg World Bond Indexes. German securities lost 1.5 percent and Spain’s gained 8.8 percent.

Before it's here, it's on the Bloomberg Terminal.