Italian Bonds Advance as Investors Weigh Renzi’s Power Challenge

Italian 10-year bonds advanced, pushing yields toward the lowest level since 2006, as investors weighed whether the debt market will sustain this year’s rally amid a possible change of prime minister.

Volumes on Italian bond futures jumped to the highest in a year as Matteo Renzi, head of the nation’s biggest political party, withdrew his support for Prime Minister Enrico Letta and urged the premier to quit. After cash bond markets closed in Europe, Letta said in an e-mailed statement that he planned to resign. German government bonds advanced for the first time in four days amid signs the euro region economy is slowing.

“Since no one expects new elections imminently, then political events’ impact on the markets should be relatively limited,” Royal Bank of Scotland Group Plc strategists Marco Brancolini, Michael Michaelides and Harvinder Sian in London wrote in an e-mailed note to clients. “Renzi is highly regarded on both the European level and by the markets.” Investors are taking it as a “marginal positive,” they wrote.

Italy’s 10-year yield fell two basis points, or 0.02 percentage point, to 3.71 percent at London’s 5 p.m. close after rising as much as six basis points to 3.79 percent. It dropped to 3.66 percent yesterday, the lowest level since February 2006. The 4.5 percent bond due in March 2024 climbed 0.175, or 1.75 euros per 1,000-euro ($1,367) face amount, to 106.865.

Volumes on the front Italian 10-year bond futures reached 90,189 contracts as of 6:13 p.m. London time, the most since Feb. 26, 2013.

‘Highly Regarded’

Letta’s ability to command a majority of lawmakers has been placed in doubt after two months of uneasy collaboration with Renzi. Italy needs “to start a new season, with a new executive that lasts for the entire mandate of this legislature,” Renzi said today in a meeting of the Democratic Party’s council of leaders in Rome. “We thank Prime Minister Enrico Letta” for his work in 10 months as premier, Renzi said.

Italy earlier sold 3.5 billion euros of three-year notes at a record-low yield of 1.41 percent.

The nation’s government bonds rallied with those of the region’s other peripheral nations this year on optimism the euro-area economy is recovering from the sovereign-debt crisis.

“The entire story is difficult to interpret,” Michael Markovich, head of global interest-rate strategy at Credit Suisse Group AG in Zurich, said of the Italian political deliberations. “The market shouldn’t overreact to that but it’s certainly not comforting. Italian bonds have rallied heavily this year, and if you see the turmoil go on further it could have a negative impact.”

German Yields

The yield on 10-year German bonds fell five basis points, or 0.05 percentage point, to 1.67 percent after climbing to 1.72 percent yesterday, the highest level since Jan. 30. A report today confirmed that the inflation rate in Europe’s largest economy stagnated last month and forecasters surveyed by the European Central Bank revised down their euro-area inflation estimates for this year, boosting the allure of fixed payments on bonds.

Germany’s 10-year break-even rate, a measure of inflation expectations derived from the yield difference between index-linked bonds and conventional securities, was at 1.34 percentage points, matching the lowest closing level since May 2012.

“The consumer-price index numbers confirm we are in a very low inflation environment,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “It’s difficult for the market to really sell off in bunds.”

German bonds were the most volatile in euro-area debt markets today, followed by those of Finland and Austria, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Italy’s bonds returned 2.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s securities rose 3.3 percent and Germany’s gained 1.7 percent.

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