Italian bond yields drop ahead of confidence vote

MILAN: Italian government bond yields were lower on Tuesday, ahead of a confidence vote in the upper house Senate that could force prime minister Giuseppe Conte to resign.

But expectations that snap elections were unlikely, coupled with ECB stimulus to fight the adverse impact of the pandemic, have limited any selloff of Italian government bonds.

Conte won a confidence vote in the Chamber of Deputies on Monday as he clung to power after a junior partner quit the ruling coalition and triggered a political crisis.

He addressed the Italian Senate on Tuesday, hoping to win over enough opposition and unaligned lawmakers to keep him in office after the small party Italia Viva led by former prime minister Matteo Renzi quit his coalition.

"Conte is likely to pass today's confidence vote with a simple majority if Italia Viva abstains as promised. This should drive 10-year BTP-Bund towards 110 basis points on diminishing political uncertainty," Citi analysts said.

They added they would expected "a knee-jerk widening" if the vote fails.

"In the event that the vote passes with a simple majority, the focus will be on how far it falls short of an absolute majority, in order to understand the risk of political instability in the near future," Unicredit analysts said.

Italy's 10-year government bond yield was down 2 basis points at 0.586%.

The spread between German and Italian government bond yields was at 108.8 basis points.

Some analysts expected appetite for high-yielding debt would prevail even in the worst-case scenario.

"With snap elections the spread is likely to jump to 150 basis points, but after that, new buyers will come to the market and the spread will gradually move versus previous levels," said Anna Guglielmetti, head of institutional portfolio management Italy at Credit Suisse.

The ZEW survey of investors' economic sentiment in Germany increased to 61.8 from expectations of a rise to 60.0 , without an immediate effect on bond prices.

Germany's 10-year government bond yield were up 1 basis point at -0.513%.

US Treasury secretary nominee Janet Yellen will tell the Senate on Tuesday that the government must "act big" with its next coronavirus relief package, while she is expected to face questions over his tax and spending proposals.

Analysts expected no change in policy when the ECB meets on Thursday as the central bank has already expanded its Pandemic Emergency Purchase Programme (PEPP).

Core European government bond yields are likely to continue to "outperform on a cross market basis to US Treasuries," MFS Investment Management said.