* Italy's Letta names government, ends political stalemate
* Italian, Spanish government bonds rally
* Bunds dip, losses limited by ECB rate cut expectations
By Marius Zaharia
LONDON, April 29 Italian bond yields fell on
Monday and were expected to ease further as a two-month-old
political deadlock came to an end after new Prime Minister
Enrico Letta named a coalition government.
The country sold debt at the lowest cost since Oct. 2010 at
an auction on Monday, meeting stronger demand than at previous
Letta, of the centre-left, was expected to win parliament's
backing in a confidence vote at 1300 GMT. He relies on the
support of his centre-right rivals, led by former premier Silvio
An inconclusive election in February left Italy, the euro
zone's third-largest economy, without an effective government,
threatening investor confidence and holding up reform efforts.
Italian 10-year yields were 12 basis points
lower at 3.95 percent, some 273 bps more than benchmark Bunds.
BTP futures were last 99 ticks higher at 115.40.
"On the very short-term the new government is supportive.
The composition is quite mixed, with good representation of the
main parties and some technocrats in the key ministries," said
Annalisa Piazza, market economist at Newedge Strategy in London.
"There is a chance that markets will price in a long-lasting
government ... of at least one year, which will be enough time
to push through some reforms."
She said the Italian/German 10-year yield spread could
narrow to 180-190 basis points over a three- to six-month
period. Rabobank's senior rate strategist Richard McGuire also
said the gap could tighten to about 200 bps.
Italy pulled other higher-yielding markets with it, with
Spanish 10-year yields down 7 bps at 4.21 percent.
Demand for riskier assets has been strong this year, with
investors aiming to maximise returns as abundant central bank
liquidity drives rates lower across the board.
Some investors were reluctant to take new positions in Italy
at the current level of 10-year yields, which is just off a
2-1/2 year low of 3.89 percent hit last week.
"We're moving towards a stabler electoral background ...
this is good news," said Sanjay Joshi, head of fixed income for
London and Capital - a group managing assets worth around $4
billion - which sold its Italian and Spanish debt holdings
before the elections.
"But we haven't made any moves yet. Economic conditions in
other euro zone countries have deteriorated."
Weaker than expected economic data in recent weeks have
fuelled expectations of a European Central Bank interest rate
cut at its meeting on Thursday. A 25 basis point move would take
its key interest rate to a new record low of 0.50 percent.
Such expectations limited losses for German debt, which is
treated as a safe haven and usually suffers when lower-rated
Bund futures were 12 ticks lower on the day at
146.42, while cash 10-year German yields were 1
basis point higher at 1.22 percent.