April 19, 2018 / 7:06 AM / a month ago

Italy/Germany bond yield gap at tightest since August 2016

LONDON, April 19 (Reuters) - The gap between Italy and Germany’s borrowing costs was at its tightest on Thursday since late 2016, as post-election political gridlock in Italy eased investors fears of a populist coalition.

Talks between the anti-establishment 5-Star Movement and the far-right League to form a coalition since March 4th’s inconclusive election have floundered.

The premium investors demand to hold Italian 10-year government bonds over benchmark German debt narrowed to as much as 117 basis points, its tightest since August 2016.

Analysts said that the lack of political progress on a coalition between the 5-star movement and the League was reassuring to markets. Both parties are hostile to EU budget rules and the anti-immigration League also wants to leave the euro zone as soon as it is politically feasible.

“One driver for the spread tightening could be that investors are skeptical that those parties can come together as well as an overall good spread environment,” said DZ strategist Daniel Lenk.

“Italy was a little bit lagging behind Spain and they are catching up now.”

The yield on Germany’s 10-year bond, the benchmark for the bloc, was up 1 basis points on the day, trading at 0.542 percent. (Reporting by Fanny Potkin; Editing by Toby Chopra)

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