Italian bonds pared recent losses today as investors took stock of the country's political stalemate, with concerns over possible fresh elections offset by the European Central Bank's bond-buying backstop.
The political crisis following indecisive election results in Italy deepened yesterday when two party leaders ruled out the most likely options to form a government, raising the chances of a fresh vote.
But, the ECB's longstanding promise to buy bonds issued by struggling states if needed has helped to limit the selloff in Italian bonds, and was expected to continue doing so over the near term. Italian 10-year bond yields were 6 basis points lower at 4.76 per cent. A recovery in equities also signalled the more positive market sentiment.
"There will be a risk premium on Italian yields until a new government is formed and we know what they're going to do with structural and fiscal reforms," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh. "But, we're not going to see a return to the levels we saw a year ago because the ECB has pledged to use its balance sheet if necessary."
Italian 10-year yields have now pared around 15 basis points of the 50 basis point rise seen earlier this week. Current yields are well above lows near 4.12 per cent hit in January, but also far below the levels above 6 per cent seen in mid 2011.
European shares also rose today with the pan-European FTSEurofirst 300 index up by 0.4 percent at 1,165.47 points while the euro zone's blue-chip Euro STOXX 50 index advanced 0.6 percent to 2,626.55 points.
The index continued a recovery from losses earlier this week, caused by Italy's political deadlock.
Austrian bank Erste topped the FTSEurofirst 300 with a 3.5 percent gain after reporting that it was targeting a stable operating profit result for 2013.
Plans by central banks to inject liquidity into markets have propped the global economy and equity markets, and the European Central Bank's head Mario Draghi reiterated this week that the ECB would continue with such measures.
However, some traders saw any further gains on equity markets as being relatively limited, due to worries over Italy and looming U.S. budget cuts due to kick at the start of March.
"I think markets will be choppy and rangebound this coming month," said Central Markets chief strategist Richard Perry. "I don't think it will break much higher, and if anything it could break lower."
