Italian bond yields rise after rallying on confidence vote win

AMSTERDAM: Italy's benchmark borrowing costs rose on Wednesday, increasing from their lowest level in over a week in earlier trade, after the government won a confidence vote in the senate and averted a collapse.

Prime Minister Giuseppe Conte narrowly secured a confidence vote in the upper house Senate on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

After falling to their lowest since Jan 11 in earlier trade at 0.533%, Italy's benchmark 10-year bond yields were last up 2 basis points to 0.57% at 11:23 GMT in line with other Southern European benchmark yields.

The closely watched gap between Italian and German 10-year yields - effectively the risk premium on Italian debt - fell to its lowest in a week around 105 basis points earlier, and was last up to 109 basis points.

The limited market reaction on Wednesday followed a sizable rally on Tuesday as news had already emerged that the government would likely survive the senate vote, sending Italian 10-year yields down 4 bps.

And though the confidence vote is out of the way, Conte failed to secure an absolute majority and now heads a minority government. That has turned attention to how much the government might struggle to implement its policy programme at a time of national emergency.

"Enthusiasm for carry and yield hunting is not likely to reemerge forcefully in the short term, given the government emerges weaker from the vote and considering the focus on reflation trades in the US," UniCredit analysts led by chief Italian economist Loredana Maria Federico told clients.

"Demand from foreign investors is not likely to pick-up strongly either as long as the political picture remains unclear," they added.

They still expect Italy's risk premium to tighten slowly, given the yield pick up Italy offers over mostly negative-yielding government bonds in the euro area, and the level of liquidity in the market thanks to the ECB's bond buying.

There was also focus on a story by Bloomberg News, which reported the European Central Bank is conducting its bond purchases with specific yield spreads in mind, a strategy that would be reminiscent of yield curve control.

Analysts suggested that may have also played a role in pulling down Italian borrowing costs from last week's highs.

Several managers told Reuters prior to the vote that they held onto their Italian bonds during the turmoil and with early elections unlikely, and saw a rise in the risk premium as an opportunity in most scenarios to buy Italian bonds at better value.

Elsewhere, German 10-year bond yields, the benchmark for the euro area, were unchanged at -0.53%.