* Italian bond yields fall for second day running
* Germany comfortably sells 3.1 bln euros of 5-yr bonds
* ECB meeting seen as key to appetite for German debt
By William James
LONDON, March 6 Italian government bond yields
fell on Wednesday as investors put their faith in the European
Central Bank's ability to prevent inconclusive elections from
driving Italy into full-blown crisis.
Investors bought back Rome's bonds for a second consecutive
session despite expectations that attempts to form a coalition
will fail, and with the country's president considering
appointing a technocrat government.
Ten-year Italian bond yields were down 9 basis
points at 4.65 percent as analysts pointed to the ECB's
long-standing, but untested, promise to backstop struggling
sovereigns by buying government bonds.
"At the moment the market is looking through everything and
saying 'Italy is not going to be allowed to leave the euro zone
and it's got too much debt to be allowed to default, so actually
this is quite a nice-yielding asset'," said Lyn Graham-Taylor,
strategist at Rabobank in London.
Italy's 10-year borrowing costs are now only 21 basis points
higher than before the poll as an initial 50 bps rise has
steadily been eroded.
The moves have been supported by a broadly more optimistic
mood around the global economy thanks to signals from the United
States, as well as expectations of another strong message from
the ECB on Thursday on its determination to see out the crisis.
Despite the demand for higher-yielding bonds, ultra-low
yielding Germany found plenty of willing buyers at an auction of
five-year bonds which came at lower borrowing costs compared to
a similar sale a month ago.
"It shows that even though investors are relatively sanguine
about the Italian political outlook, the unclear picture in
Italy and the continued weakness of the euro zone economy are
providing good support for the German government bond market,"
said Nick Stamenkovic, strategist at RIA Capital Markets.
German Bund futures were four ticks higher on the
day at 145.07 with the near-term outlook for core debt dominated
by Thursday's ECB meeting, at which dealers increasingly believe
the central bank will signal an accommodative policy outlook.
"We think they'll show they had a serious discussion on
rates and with the new round of staff forecasts they may just
pave the way for a cut," a trader said.
But, while that may encourage bonds broadly to rally in
anticipation of lower rates, in the short term it may help keep
investors in the mood to buy the euro zone's riskier debt in
preference to Bunds.
"At the moment risk assets seem to take central bank
dovishness on board more than bonds do," the trader said.
The strong demand for five-year debt supported the idea that
markets were now wary of a rate cut. The bonds on offer had been
seen as expensive relative to other maturities, but solid demand
suggested buyers were happy to take on debt with the view that
current yields would look attractive if rates did fall.