Italian bonds fell for a second day as former Prime Minister Silvio Berlusconi's political party threatened to stop supporting the government, risking the disintegration of the parliamentary coalition.
The decline pushed the 10-year yield up by the most in more than four months. Prime Minister Mario Monti survived a confidence vote after the head of Berlusconi's People of Liberty party in the Senate said his group wouldn't put the full weight of its support behind the bill. German bunds advanced for a third day before European Central Bank policy makers announce the result of their monthly interest-rate-setting meeting.
"Political risk has clearly increased in Italy today, even though Mr Monti survived," said Nick Stamenkovic, a fixed- income strategist at RIA Capital Markets Ltd. in Edinburgh. "That's undermined peripheral bonds today, particularly Italy, and given a little bit of support to bunds."
Italian 10-year yields jumped 13 basis points, or 0.13 percentage point, to 4.58 percent at 12:13 p.m. London time, after climbing as much as 18 basis points, the most since Aug. 2. The 5.5 percent bond due November 2022 fell 1.065, or 10.65 euros per 1,000-euro ($1,307) face amount, to 107.675. Two-year yields rose 16 basis points to 2.09 percent, after reaching 2.16 percent, the most since Nov. 21.
Berlusconi's People of Liberty party will take a position of abstention regarding the government, according to Maurizio Gasparri, head of the party in the Senate. Italian 10-year yields have fallen from more than 7 percent when Berlusconi's government unraveled in November 2011 to be replaced by an administration of technocrats led by Monti, a former European Union competition commissioner and economics professor.
The German 10-year yield fell two basis points to 1.33 percent, the least since Nov. 16. Two-year notes yielded minus 0.012 percent.
The ECB will keep its main refinancing rate at an all-time low of 0.75 percent, according to the median estimate of analysts in a Bloomberg survey. The central bank will announce the rate decision at 1:45 p.m. in Frankfurt before President Mario Draghi holds a press conference 45 minutes later. He will unveil the latest economic forecasts, including a first projection for 2014.
German bonds returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 4.9 percent and Italy's bonds made 20 percent.