LONDON: Italian bonds outperformed other euro zone debt on Wednesday as former premier Silvio Berlusconi was expected to steer his political allies away from moves to bring down the government.
Market moves were limited, however, as investors were wary of making big shifts in asset allocations before the end of a two-day Federal Reserve meeting, where US central bankers are expected to start withdrawing monetary stimulus.
Berlusconi was expected to release a video message later on Wednesday, in which political sources said he would step back from weeks of threats to sink the right-left coalition of Prime Minister Enrico Letta.
The threats were related to a Senate vote later in the day on whether to expel him following his tax fraud conviction.
Ten-year Italian yields were 2 basis points lower on the day at 4.39 percent. Most other euro zone yields were higher as investors saw the Fed meeting as the beginning of the end for the ultra-loose monetary policy employed by the world's major central banks.
"Investors are hopeful that he will try to be more diplomatic and the coalition will remain in place and that clearly would be good news for Italian government bonds," Nick Stamenkovic, bond strategist at RIA Capital Markets said.
But he added: "You never know with Mr. Berlusconi, he can surprise the markets in either direction."
Italian yields fell back below those of Spain on Tuesday, having overtaken them for the first time in 18 months last week.
Spain is due to sell 2-3 billion euros of five- and 15-year bonds on Thursday. The auction is expected to go smoothly, although some uncertainty remains about what impact could the Fed meeting have on demand for the auction.
"Italy's overperformance of Spain is very relevant and there is room for more of that. We have supply coming out of Spain tomorrow and that can have an impact as well," ING rate strategist Alessandro Giansanti said.
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