Italian bond yields off highs on talk of new govt without election

Broader euro zone bond yields also fell, with Germany's 10-year bond yield, the benchmark for the bloc, down 2 basis points to -0.54%.. In the primary market, the European Union hired banks for its first bond sale of the year, to sell a new seven-year bond and re-open the 30-year bond it issued last November backing its SURE unemployment scheme, according to a lead manager memo seen by Reuters.

Italy's borrowing costs fell from two-and-a-half-month highs on Monday as investors focused on the chance that snap elections may be averted by the formation of a new government. Italian Prime Minister Giuseppe Conte could resign as early as Tuesday and then form a fresh coalition that would draw on centrist and "responsible" members of parliament, according to La Repubblica.

Rome's bonds are rallying after coming under pressure on Friday, when ruling parties flagged snap elections as the only way out of a political impasse. On Monday, Italy's 10-year bond yield were last down 5 basis points to 0.66% at 1222 GMT, wiping out much of Friday's sell-off, after touching two-and-a-half-month highs earlier.

The gap between Italy and Germany's 10-year yields -- effectively the risk premium on Italian debt -- was at 118 basis points, dipping from its highest since November above 120 basis points on Friday. "Italian bonds are taking well news of a possible Conte resignation before the senate vote later this week," said Antoine Bouvet, senior rates strategist at ING.

Italian bonds continued their rally despite Reuters citing a government source suggesting that Conte is not in fact planning on resigning with a view to forming a new government. "My impression is that the market attributes a good chance of the prime minister's gambit (resigning now to gain a new mandate to form a new government) succeeding," Bouvet said.

Elsewhere, German business morale fell more than expected in January as a second wave of COVID-19 brought a recovery in Europe's largest economy to a halt, the Ifo institute business climate index showed. Broader euro zone bond yields also fell, with Germany's 10-year bond yield, the benchmark for the bloc, down 2 basis points to -0.54%..

In the primary market, the European Union hired banks for its first bond sale of the year, to sell a new seven-year bond and re-open the 30-year bond it issued last November backing its SURE unemployment scheme, according to a lead manager memo seen by Reuters. Reuters first reported last week that the EU was discussing these maturities with investors.

The deal will be "launched in the near future, subject to market conditions", a phrase debt management offices usually use a day before a sale. The European Central Bank's weekly asset purchase data and speakers including ECB head Christine Lagarde will be in focus later on Monday.

Euro zone bond yields rose last Thursday, when the bank was perceived in its policy decision as emphasizing that it may not use the firepower of its pandemic bond purchases in full.

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