LONDON, June 1 (Reuters) - Italy’s government bond yields fell sharply in early Friday trade after the country’s anti-establishment parties revived a coalition deal, removing the risk of fresh elections.
Two-year bond yields were down 40 basis points at 0.77 percent, retreating back to levels seen before a market rout on Tuesday saw yields rocket to 5-year highs.
Ten-year Italian bond yields were nearly 18 bps lower at 2.66 percent, well below peaks seen earlier this week above 3 percent.
That pulled the gap over benchmark 10-year German bond yields to 228 basis points, down from 242 bps late Thursday.
The leaders of the right-wing League and the 5-Star Movement late on Thursday patched up their alliance after agreeing to substitute a eurosceptic they had initially proposed as economy minister, a nomination that had been rejected by the head of state.
The coalition deal promises to increase spending and challenge European Union fiscal rules. (Reporting by Dhara Ranasinghe; Editing by Saikat Chatterjee)