Italian debt yields soften after Draghi speech

"The market is giving Italy the benefit of the doubt that Draghi will stay in power and avoid early elections in autumn," Scicluna said. Elsewhere, risk appetite was also buoyed and the itraxx Europe crossover index, which measures the cost of insuring exposure to sub-investment grade European corporate high-yield bonds, fell for a second day to its lowest level in more than three weeks on news that Russian gas supplies to Europe will resume on Thursday after a maintenance shutdown.

Italian government bond yields fell across maturities on Wednesday on signs that Mario Draghi might remain as prime minister after he demanded unity among his coalition partners if they want him to remain in office. Italy was plunged into a political crisis last week when Draghi tendered his resignation after senators from the populist 5-Star Movement refused to support the government in a confidence vote. The move pushed bond yields higher and weighed on the euro.

But Draghi's speech in the upper house on Wednesday calmed market sentiment, helping to send yields on 10-year Italian debt falling 10 basis points (bps) from opening trades. Yields on 2-year debt fell by a similar margin to 1.25%. "The market is encouraged by the news that Draghi is willing to stay, though he is not making it easy for other parties," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

The result of a vote on the prime minister's speech was expected by 1730 GMT. "The market is giving Italy the benefit of the doubt that Draghi will stay in power and avoid early elections in autumn," Scicluna said.

Elsewhere, risk appetite was also buoyed and the itraxx Europe crossover index, which measures the cost of insuring exposure to sub-investment grade European corporate high-yield bonds, fell for a second day to its lowest level in more than three weeks on news that Russian gas supplies to Europe will resume on Thursday after a maintenance shutdown. "The general mood in the market has improved due to the Nord Stream resumption news as the tail risks of an extended shutdown has faded," said Peter McCallum, a rates strategist at Mizuho Bank in London.

Yields on benchmark 10-year German government debt stabilized at 1.23%, just below a one-week high of 1.31% hit on Tuesday. Russian gas flows via the Nord Stream 1 pipeline are expected to restart on time on Thursday after the completion of scheduled maintenance, two sources familiar with the export plans told Reuters.

If Russian gas supplies, currently the single biggest determinant for Europe's economic outlook, were to seize up, economic activity could tumble by more than 6% in some countries the International Monetary Fund warned. "A positive solution to the crisis could lead to moderate tightening of the 10Y BTP-Bund spread, below 200 bps as a first target and possibly as low at 180 bps depending on the message from the ECB on Thursday," UniCredit strategists said.

The spread was trading at about 205 bps on Wednesday.