Italy yields slip after government wins confidence vote

LONDON: Italian yields nudged lower on Wednesday after Prime Minister Enrico Letta won a confidence vote on his 2014 budget plans, lowering the risk of snap elections and bolstering his ruling coalition.

The vote late on Tuesday came on the eve of a Senate vote expected to ban centre-right leader Silvio Berlusconi from parliament over a tax fraud conviction.

Berlusconi's party voted against the budget, formalising a break with the left-right coalition, although some rebels who broke away from the former premier this month backed Letta.

Italian 10-year yields were 1 basis point lower on the day at 4.05 percent and some analysts expected them to resume their downward trend after a debt sale on Thursday.

"The chances of the Letta government surviving have increased over the past few weeks with the split in Berlusconi's party," said Marius Daheim, chief strategist at Bayerische Landesbank.

"Italian spreads still seem to be on a downtrend but taking a broader look at the periphery as a whole the spread tightening we've seen seems to have stagnated over the past weeks."

Italy's 10-year yield premium over German Bunds was stable at around 236 basis points as bets the European Central Bank might ease monetary policy further continued to support both highly rated and peripheral euro zone bonds.

Those expectations and Italy's reduced funding schedule are seen fuelling demand at Rome's sale of up to 2.5 billion euros of bonds maturing in 2024 on Thursday.

German Bund futures slipped 5 ticks to 141.65 while the 10-year cash yield was flat at 1.69 percent ahead of an auction of 4 billion euros of 10-year Bunds.

The market took in its stride news that German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) had reached a deal to form a grand coalition, two months after Merkel's landslide election victory.

"Although the SPD's (pending) vote means a 'Grand Coalition' is not yet in the bag, ongoing progress toward this outcome is entirely in line with market expectations and so should also have little if any discernible near term impact," Rabobank strategists said in a note.