The FINANCIAL — Italian government bonds rallied sharply Monday, pulling two-year yields to euro-era lows, as the re-election of Giorgio Napolitano as president fueled hopes of ending Italy's current political stalemate.
Italian debt has proved remarkably resilient since the country's inconclusive election in late February, in which no party won a stable governing majority, as the agreement between Italy's main center-left and center-right parties to back the 87-year-old Napolitano removed a significant hurdle to the formation of a new government.
Yields tumbled as investors snapped up Italian bonds in early trading. Two-year yields fell by 0.12 percentage point to 1.43%–the lowest since the inception of the single currency–while 10-year yields sank 0.14 percentage point to 4.08%, within a whisker of their lowest level since late 2010, according to Tradeweb.
As Borsa Italiana Spa said, the prospect of a new government "should reinforce the resilience of the Italian government securities regardless of whether the new government may be inherently unstable and, in reality, only delay elections to 2014 as opposed to later this summer," according to interest rate strategists at Barclays.
Debt issued by other fiscally-fragile euro-zone countries, such as Spain and Portugal, also rallied, as the Italian news gave risk appetite a boost.
Still, some analysts warned that the decision to re-elect a president for the first time reflects a failure by Italy's political parties to reach a new consensus, rendering any new governing coalition inherently unstable.
"Such a governing arrangement underpinned as it is by the politics of negativity, is likely to be fraught with longevity risk with a return to the polls still looking a likely outcome over the short term," said interest rate strategists at Rabobank International.
Still, the abundant liquidity in financial markets, and an ongoing hunt for higher yielding securities should continue to support Italian debt for the time being, Rabobank added.
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