Italian bonds rally after change in electoral law rejected

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LONDON, Jan 17 (Reuters) – Italian government bonds rallied on Friday after Italy’s highest court rejected a proposed change in electoral law that would probably have benefited the far-right League.

The Constitutional Court on Thursday rejected a request by the League to hold a referendum to introduce a first-past-the-post electoral system.

Such a system would have increased the chances of a League-led centre-right bloc winning a big majority at the next election, putting pressure on the struggling government of the 5-Star Movement and the Democratic Party (PD).

Ten-year Italian government bond yields fell around 3 basis points in early trade, after a sell-off raised yields 5 basis points on Thursday.

“This is good news from a market perspective because it very much reduces the risk that we would have an absolute majority by the League,” said DZ Bank rates strategist Daniel Lenz.

However, uncertainty remains from another referendum expected to be held on cutting the number of members of parliament.

Elsewhere, data on Friday showed China’s economy ended a rough year – leading to its weakest growth in nearly 30 years – on a somewhat firmer note. The trade truce with the United States revived business confidence and earlier growth-boosting measures appeared to be taking hold.

Euro zone final inflation numbers for December are due at 1000 GMT. They are expected to confirm estimates released at the start of the month showing inflation picking up to 1.3% from 1% a month earlier.

Most other euro zone bond yields were flat on the day, with Germany’s 10-year yield at -0.21%, below two-week highs around -0.17%.

Moody’s will review Portugal’s rating later on Friday. The agency changed its outlook on the Baa3 rating to positive in August, meaning that an upgrade is eventually possible.

While an upgrade on Friday wouldn’t be a huge surprise, “I don’t see that so much changed in Portugal in the last six months. It would usually be fair to expect it [an upgrade] to take more time,” DZ Bank’s Lenz said. (Reporting by Yoruk Bahceli, editing by Larry King)

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