LONDON: German Bunds fell on Wednesday after Italian Prime Minister Silvio Berlusconi agreed to step down, giving a boost to risk appetite on bets that Italy will become more willing to pursue structural reforms.
Losses were capped by an increase in the initial margin call by repo clearing house LCH.Clearnet S.A. on Italian debt.
Italy, the world's third-largest debt market, has faced a bond sell-off in recent weeks that brought its 10-year yields close to 7 percent, a level at which countries like Portugal and Ireland were forced to ask for financial help.
The market pressure on Italy started a few months ago, when Berlusconi hesitated to back austerity measures proposed by his finance minister. But even when Berlusconi goes, there is no guarantee that reforms to cut debt and boost growth will be quickly implemented and relief on markets may not last long.
The European Central Bank, whose purchases of Italian bonds are crucial to keep yields below 7 percent, has said its bond buying programme was conditional on Italy pursuing reforms.
"(Bund) markets will be down, obviously, but we'll see what the alternatives (to Berlusconi) are," one trader said.
At 0724 GMT, Bund futures were 46 ticks down on the day at 137.57. Italian BTP futures were 38 ticks lower at 92.316 after rising as high as 93.45 in early trade, although volumes were thin.
In Greece, where Prime Minister George Papandreou also said this week he will resign, political parties were close to reaching a deal on forming a new government which will secure the next bailout tranche.
But questions will remain on issues such as whether the EFSF bailout fund will have enough power to fight contagion and if euro zone politicians will be prepared to take further measures against the crisis and Bunds may bounce back in the near future.
"It is not only Berlusconi's fault that Europe is in a mess," the trader said.