May 8, 2018 / 8:55 AM / in 15 days

RPT-Italian snap election worries knock Italian bonds, stocks

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LONDON, May 8 (Reuters) - Italian stocks and government bonds sold off sharply on Tuesday as the prospect of an early election strengthened, sparking worries of fresh political turmoil in the euro zone’s third largest economy.

President Sergio Mattarella called on Monday for Italy’s bickering parties to rally behind a “neutral government.” Italy’s two largest parties, the far-right League and anti-establishment 5-Star Movement, came out against the proposal.

This raises the likelihood of an unprecedented immediate return to the polls, even as early as July.

Italy’s 10-year government bond yield jumped 7 basis points to a six-week high at 1.83 pct and was set for biggest its one-day jump since Feb 21.

The Italy/Germany 10-year bond yield spread was at its widest in the three weeks at 129 basis points.

Milan’s FTSE MIB index was down 1.8 percent, with Italian banks taking a strong hit and set for their worst day in two months.

Meanwhile, Italian 5-year credit default swaps rose to their highest in over two weeks at 91 basis points, according to data from IHS Markit. (Reporting by Abhinav Ramnarayan, Additional reporting by Karin Strohecker and Thyagaju Adinarayan; Editing by Dhara Ranasinghe)

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