Italian bonds hit as split in coalition threatens government stability

ITALIAN bond yields jumped yesterday with 10-year rates set for their biggest daily rise since November and five-year yields returning to positive territory on fears of political uncertainty.

Italian Prime Minister Giuseppe Conte will not try to forge a new government with the Italia Viva coalition party if it follows through on a threat to quit the cabinet, a source in Mr Conte’s office said.

Italia Viva is a centrist party led by former PM Matteo Renzi could bring down Mr Conte’s government as Italy struggles to contain the Covid-19 pandemic.

Italy’s 10-year benchmark yield rose as much as 11 basis points to 0.65pc, the highest since December 2. Five-year yields rose to positive territory for the first time since mid-November and saw their biggest daily rise since early May.

“The clash between Prime Minister Giuseppe Conte and the head of the Italia Viva party, Matteo Renzi, is reaching its peak,” Erjon Satko strategist at BofA said.

“Some headlines are weighing heavily on Italian government bond prices. The market is worried about any development that could lead to a eurosceptic policy in Italy,” he added.

“Snap elections are still unlikely, but risk has increased,” Citi analysts said in a research note.

Bond yields elsewhere in the euro area also rose, but less than in Italy, supported by the European Central Bank backstop as coronavirus restrictions continue to weigh on the economic outlook, while a reflation trade is pushing US Treasury yields higher.

Analysts expected the ECB to buy an amount of bonds broadly in line with the January net supply, which was estimated at around €150bn.

Italy is not the only eurozone country that faces big political challenges this year as German Chancellor Angela Merkel is set to step down.