Italian Bonds Rally as Five Star Expected to Approve New Coalition

(Bloomberg) --

Italian bonds surged to send benchmark yields to fresh record lows, as investors bet that members of the Five Star Movement will ratify an alliance to form a new government.

Yields have plummeted over the past month as a coalition with the Democratic Party grows increasingly likely, with the Five Star members’ vote proving one of the last hurdles. One recent poll showed that 51% of its members will back the agreement, seen as a market-friendly scenario as the two parties are less likely to spar over deficit limits with the European Union.

The bond rally is a turnaround from last year, when yields sky-rocketed amid a budget dispute with Brussels. The debt has caught up with a global rally, yet is one of the few that still offers investors an escape from the growing pile of negative-yielding securities in the region. It’s expected to benefit further if the European Central Bank resumes asset purchases this year.

“Positive politics developments, the yield grab bid and QE expectations” are all feeding the rally, said Imogen Bachra, a European rates strategist at NatWest Markets Plc. The bank is targeting Italy’s 10-year yield spread over Germany to narrow to 140 basis points over the next two months. The 30-year bond yield will drop to 160 basis points, the bank said.

Ten-year yields fell as much as 10 basis points to 0.87%, a record low, with the premium over those on German bonds falling to 158 basis points. Thirty-year yields were at 1.92%.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, William Shaw

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