Italian bond yields creep up before key votes in parliament

LONDON: Italy's borrowing costs crept back up on Monday as Prime Minister Giuseppe Conte faced two days of parliamentary votes that will decide if his fragile coalition can cling to power or has lost its majority.

Political turmoil in Italy, one of the euro zone's biggest and most indebted economies, is once again weighing on sentiment. Italian 10-year bond yields rose around 9 basis points last week, the biggest weekly jump since October.

Hefty stimulus from the European Central Bank and an expectation that a snap election is unlikely for now have limited the selloff in Italian bonds.

Still, the renewed turmoil has paused a rally in Italy's bond market that had sent the 10-year bond yield gap over Germany to 98 bps just a week ago.

That was the tightest spread since 2016 and it has now widened out to 113 bps. Italy's 10-year bond yield was last up 2 bps on the day at 0.60% as investors awaited the outcome of the votes in parliament. They held below six-week highs hit last week.

"We still view snap election risks as remote even if Conte fails, as a government of national unity probably remains the preferred attempt of President Mattarella until the next regular election in 2023," said Commerzbank rates strategist Rainer Guntermann.

Conte will address the lower house on Monday and the upper house, the Senate, on Tuesday about the future of his government after a junior partner quit the cabinet in a row over his handling of the coronavirus and economic crises.

Attention is focused on the 321-seat Senate, where Conte looks certain to fall short of an absolute majority after his efforts to persuade centrists in opposition ranks to rally to his side looked to have failed.

Away from Italy, euro zone bond markets were relatively subdued. US markets are closed for a holiday on Monday and traders are largely side lined ahead of Thursday's ECB meeting.

There was some focus on Germany, where centrist Armin Laschet was on Saturday chosen to lead Angela Merkel's Christian Democrats, putting him in pole position to succeed her as Germany's next chancellor.

"On the face of it, this might be viewed as a positive when it comes to European government bond spreads as Laschet would arguably be likely to adopt a less strident approach to EU affairs than (arch-conservative Friedrich) Merz," Rabobank analysts said in a note.

Germany's 10-year bond yield was trading at -0.54% , little changed on the day.