May 22, 2018 / 10:55 AM / 7 months ago

Italy bond yields off multi-month highs as markets weigh political risk

LONDON (Reuters) - Italian government bond yields slipped from multi-month highs on Tuesday after six days of heavy selling, though reports that the incoming coalition could pick a eurosceptic figure as economy minister tempered the recovery in bonds.

The likelihood of a government comprised of the anti-establishment 5-Star Movement and the far-right League has pushed Italian 10-year yields up nearly 60 basis points since the start of the month.

Analysts said the price falls of recent days might render the debt attractive again for some, despite fears of a government spending binge in one of the most indebted euro zone states. As some buying crept in, 10-year yields eased more than 4 basis points at one stage to a session low of 2.28 percent, off 14-month highs of 2.418 percent IT10YT=RR.

Those falls were partly reversed, however, after the Italian news agency Ansa reported that eurosceptic economist Paolo Savona was in the running to become economy minister in a new government.

In late trade, Italian 10-year bond yields down just 1 bps at 2.32 percent.

Savona has been quoted in the national press in recent years as saying that the euro is a “noose around Italy’s neck”. While 5-Star and the League have been careful to tone down their anti-euro rhetoric, Savona’s appointment, if confirmed, may bring back currency traders’ concerns.

“Savona’s background as a vocal critic of Europe’s construction make him the least market-friendly candidate,” Mizuho strategists told clients.

Two-year Italian yields meanwhile were down 8 bps at 0.19 percent IT2YT=RR. The closely watched Italy/Germany 10-year bond yield spread — a reflection of the premium investors demand to hold Italian risk compared with “safe” German bonds — was at 179 bps, widening after having tightened to around 171 bps earlier.

The spread had widened to almost 190 bps in early trade DE10YT=RR.

Investors are waiting to hear if President Sergio Matarella will confirm the coalition’s proposal for prime minister - Giuseppe Conte, a little-known law professor.

A source close to the president told Reuters Matarella had not yet decided whether to give Conte the mandate.

The mood was less gloomy than in past days, however. Goldman Sachs analysts for instance did not see a euro zone crisis or domestic financial meltdown along the lines of Greece some years ago.

A Milan-based fixed income strategist said financial markets were on the whole sanguine about Italian risks.

“If implemented, the 5-Star/League program is a recipe for disaster as there’s not hint of fiscal discipline,” he said, asking not be named. “Still, there is some scepticism in markets that this program will be implemented.”

FILE PHOTO: Presentation of a new 2 Euro commemorative coin of former German Chancellor Helmut Schmidt in Berlin, Germany, February 2, 2018. REUTERS/Christian Mang

Spanish and Portuguese bond yields, meanwhile, remain well below the multi-month highs touched on Monday. Spanish 10-year yields were down 6 bps at 1.46 percent. ES10YT=RR PT10YT=RR.

Germany’s 10-year bond yield, which tends to fall when regional risks rise, was up 4 bps at 0.56 percent DE10YT=RR.

The cost of insuring exposure to Italian debt in the 5-year credit default swaps market rose earlier in the day to a new seven-month high of 142 bps, according to IHS Markit.

Reporting by Abhinav Ramnarayan and Sujata Rao; Additional reporting by Dhara Ranasinghe; editing by David Stamp and Alison Williams

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