AMSTERDAM: Italy's benchmark borrowing costs dropped to their lowest in over a week on Wednesday after its government won a confidence vote in the senate and averted a collapse.
Prime Minister Giuseppe Conte narrowly won a confidence vote in the upper house Senate on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Italian benchmark 10-year bond yields dropped to their lowest since Jan 11 - before Conte lost his majority - at 0.533%, down 2 basis points on the day.
That pushed the closely watched gap between Italian and German 10-year yields - effectively the risk premium on Italian debt - down to 105 basis points, also the lowest in a week.
But even though the confidence vote is out of the way, Conte failed to secure an absolute majority and now heads a minority government. That has turned focus to how much the government might struggle to implement its policy programme at a time of national emergency.
"Enthusiasm for carry and yield hunting is not likely to reemerge forcefully in the short term, given the government emerges weaker from the vote and considering the focus on reflation trades in the US," UniCredit analysts led by Italy chief economist Loredana Maria Federico told clients.
"Demand from foreign investors is not likely to pick-up strongly either as long as the political picture remains unclear," they added.
They still expect Italy's risk premium to tighten slowly, given the yield pick up Italy offers over mostly negative-yielding government bonds in the euro area, and the level of liquidity in the market thanks to the ECB's bond buying.
There was also focus on a story by Bloomberg News, which reported the European Central Bank is conducting its bond purchases with specific yield spreads in mind, a strategy that would be reminiscent of yield curve control.
Analysts suggested that may have also played a role in pulling down Italian borrowing costs from last week's highs.
Many fund managers last week told Reuters they held onto their Italian bonds during the turmoil and with early elections unlikely, and saw any rise in the risk premium as an opportunity to buy Italian bonds at better value.
Elsewhere, German 10-year bond yields, the benchmark for the euro area, were unchanged at -0.53%.
Germany will re-open a 30-year bond later in the session via auction.