* Yields up 27 bps after League leader calls end to government
* 10-year yield hits one-month high of 1.814%
* Italy/Germany spread closer to key 240 bps level (Adds details, updates prices)
By Virginia Furness and Saikat Chatterjee
LONDON, Aug 9 (Reuters) - A selloff in Italian government bonds accelerated on Friday with yields on track for their biggest weekly rise this year as the government stood on the brink of collapse after League leader Matteo Salvini said his coalition with the 5-Star Movement was untenable and called for early elections.
After months of tension, Salvini said on Thursday there was no way to patch up the parties’ differences. He told Prime Minister Giuseppe Conte the alliance had collapsed and “we should quickly give the choice back to the voters”.
Nervous investors dumped Italian debt, pushing yields on its 10-year bonds up 27 basis points to 1.814% - a five-week high and the biggest daily rise since May 2018, before yields retraced slightly lower to stand at 1.77%.
For the week, yields are up 24 basis points so far this week, their biggest rise since October 2018.
Shorter-dated Italian yields also rose sharply, with the two-year up 27 bps at 0.283%, and the five-year up 15 bps at 1.105%.
The Italy/Germany 10-year bond yield gap widened to a five-week high of 237 bps, coming closer to the 240 bps mark that some analysts view as a technical ceiling.
“Italy is the main story at the moment and I don’t see any respite for bonds as the market will be grappling with the election related uncertainty,” said Peter McCallum, a rates strategist at Mizuho in London.
Italy, which has Europe’s second-largest sovereign debt burden after Greece, has angered the European Union with an expansionary 2019 budget and Salvini wants to make major tax cuts next year, setting up the prospect of another clash with Brussels.
Italy is due to present its 2020 budget to the EU by mid-October. The political uncertainty may delay this process and commentators suggest that President Sergio Mattarella - the only person who can dissolve parliament - will want to secure the budget process before going to the polls.
“It is uncertain whether he can find enough support in parliament for a technocratic government that would have to make difficult fiscal choices, however,” ING rates strategists wrote in a note.
ING expects further widening in Italian spreads and expects the 10-year BTP-Bund spread to test 250bp in the short term, and then 300bp if elections take place this year without a 2020 budget in place..
“There’s huge uncertainty over the timing of the break-up of the government,” said Daniel Lenz, rates strategist at DZ Bank. “If we have snap elections in October, that is really bad timing because the government has to deliver the 2020 budget plan to Brussels.”
Moves in the Italian bond market were also exacerbated by the summer lull, with many dealing rooms thinly staffed.
Outside of Italian debt, government bonds in Europe enjoyed a quiet close to an eventful week for global markets as concerns of a flare-up in the trade war between Washington and Beijing prompted investors to dump risky assets.
German government bond yields reversed Thursday’s rises after a senior government official said Berlin was considering a fiscal U-turn to issue new debt to finance a climate protection programme.
The 10-year Bund yield was at -0.582%, from a high on Thursday of -0.523%.
British bond yields fell for the fourth consecutive week as data showed the economy shrank for the first time since 2012 in the second quarter.
Reporting by Virginia Furness Editing by Josephine Mason, John Stonestreet and Frances Kerry