Italy's bond yields fall, talk of early election causes stir

LONDON: Italian bond yields fell on Wednesday, outperforming euro zone peers after a local media report raised the prospect of fresh elections next year and a rally in stock markets supported appetite for riskier assets.

Italian Deputy Prime Minister Matteo Salvini denied on Wednesday a report in la Repubblica daily saying that his ruling League party was considering pushing for a snap election in March.

Italy's bond yields, which fell sharply in early trade, pulled off their lows after Salvini's denial but remained lower on the day.

"The prospects of an early general election that would be expected to lead to a more stable political situation is something that would get positive attention from BTP investors," said DZ Bank strategist Andy Cossor, referring to Italian debt.

Italian bond yields were down about three basis points on the day across the curve, having fallen as much as five bps in early trade.

Ten year bond yields were last down 3.5 bps at 3.08 percent .

Snap elections, seen as unlikely until at least after European Union parliamentary elections in May, remain a risk that could take investors by surprise.

Since the general election this March, the far right League has gained ground in opinion polls, while support for its anti-establishment coalition partner 5-Star has faded.

"The League is much stronger in the polls and must be chomping at the bits to call a vote," said Peter Chatwell, head of rates strategy at Mizuho.

He added that Italian bonds were also drawing support from hopes of a lower budget deficit forecast.

Prime Minister Giuseppe Conte said on Tuesday he was working hard to bridge the gap with Brussels over Italy's expansionary 2019 budget.

Outside Italy, French bond yields were steady as the market stabilised after three-days of heavy selling triggered by violent government protests.

There was also focus on Britain, where lawmakers in British Prime Minister Theresa May's Conservative Party triggered a confidence vote in her leadership after Britain's planned divorce from the European Union was plunged into chaos.

That backdrop kept safe-haven German 10-year bond yields pinned close to recent six-moth lows around 0.22 percent .