Italian Bond Yields Fall Toward Eight-Year Low as Letta Resigns

Italian bonds advanced, with 10-year yields falling toward the lowest since 2006, as the resignation of Prime Minister Enrico Letta fueled speculation his replacement will give a renewed impetus to reform measures.

The nation’s 10-year securities rose for a second day as a government report showed the economy expanded in the three months through December, the first quarterly gain in more than two years. Democratic Party General Secretary Matteo Renzi, who commands the biggest contingent of lawmakers, said yesterday he wanted to avoid new elections. Spanish and Portuguese bonds also gained, while benchmark German bunds declined.

“The main expectation is that the president will appoint Renzi to try to form a new government,” said Mathias Van Der Jeugt, a research analyst at KBC Bank NV in Brussels. “It’s clear that markets have confidence that Renzi may be able to deliver much-needed reforms. The news, in the short term at least, is a positive. Whether it can take yields much lower is a different story.”

Italy’s 10-year yield fell three basis points, or 0.03 percentage point, to 3.68 percent at 4:30 p.m. London time after declining to 3.66 percent on Feb. 12, the lowest since February 2006. The 4.5 percent bond due in March 2024 rose 0.235, or 2.35 euros per 1,000-euro ($1,369) face amount, to 107.10.

Letta’s resignation paved the way for President Giorgio Napolitano to start talks with political parties to appoint a new premier. Renzi ended Letta’s 10-month-old government after the Democratic Party leadership voted to withdraw its support from the Prime Minister, who is also am member of the party.

Quicker Growth

Gross domestic product increased 0.1 percent in the fourth quarter from the previous three months when it was unchanged, the national statistics institute Istat said in a preliminary report in Rome. The growth matched the median forecast in a Bloomberg News survey.

Italian 10-year bonds reversed losses yesterday after Renzi said he wanted to avoid another popular vote.

“Yesterday, the markets were quick to show their approval for Renzi’s candidature,” Daniel Lenz, an economist at DZ Bank AG in Frankfurt, wrote in an e-mailed report. “Positive sentiment on the markets will only hold if Renzi can prevent the government from breaking up and at the same time if his promises are translated into action.”

Moody’s Investors Service is scheduled to publish a report on Italy’s credit worthiness today. The company rates Europe’s biggest debt market at Baa2 with a negative outlook.

‘Cautious Approach’

“Investors are likely to adopt a cautious approach in the very near term, waiting for Moody’s announcement and more clarity on political developments,” Giuseppe Maraffino, a fixed-income strategist at Barclays Plc in London, wrote in a note. “However, the takeover of Renzi is likely to be seen by the market as a moderately positive event as it would increase the likelihood of an acceleration of the reform process.”

Italian bonds have 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.

Gross domestic product in the euro zone rose 0.3 percent after a 0.1 percent increase in the third quarter, the European Union’s statistics office in Luxembourg said today. That exceeded the median forecast of 0.2 percent in a separate Bloomberg survey.

Spain’s 10-year yield dropped four basis points to 3.59 percent after declining to 3.57 percent, the lowest since March 2006. Yields on similar-maturity Portuguese bonds fell eight basis points to 4.94 percent.

German bunds dropped along with French and Belgian securities as demand for the region’s safest assets waned.

The German 10-year yield climbed two basis points to 1.69 percent, France’s increased two basis points to 2.28 percent and Belgium’s rose one basis point to 2.44 percent.

Italy’s government securities returned 2.6 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s advanced 3.4 percent and Germany’s gained 2 percent.

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