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Renewed Italian government tensions fuel bond sell off, Greek bonds also pressured

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Short-dated Italian government bonds sold off for the second straight day on signs of deepening tension within the Italian government that are raising the prospect of new elections, triggering a sell-off in the periphery, with the Greek 10-year yield reaching 4.135%, showing how vulnerable GGBs still remain to foreign developments, despite the fact that Greece will emerge from its bailout program in just two weeks time. 

Combined with the International Monetary Fund’s Article IV report, this fresh market unrest increased reservations that the market still has toward Greece, and has raised another obstacle to any plans the Greek government might have for a new bond issue in the summer.

Turning to Italy, Prime Minister Giuseppe Conte had summoned top ministers to discuss next years budget on Friday as investors concerned about Romes spending plans sold Italian bonds and the national statistics bureau said the economy would keep slowing. Conte said later the government had fixed the framework of its 2019 budget to be presented in September, and promised reforms that would ensure stronger economic growth, Reuters reports.

Economy Minister Giovanni Tria is under pressure from within the government to ramp up spending and challenge European Union budget rules. The possibility that he might be forced to resign has investors worried that Italy could go on a spending binge, or even that new elections could be triggered.

At one stage, Italys two-year and five-year government bond yields rose as much as 25 basis points to eight-week highs of 1.36 percent and 2.39 percent respectively. 

Also putting pressure on Italian yields are concerns over how rising Italian borrowing costs could affect the countrys banks, which hold large amounts of government debt. Shares in the Italian post office fell nearly six percent on Thursday and on Friday Monte dei Paschi di Siena shares fell 8 percent at one stage.

Investors are turning to the safety with most high-grade euro zone bond yields turning lower on the day, with benchmark German 10-year government bond yields down 3 bps at 0.43 percent.

 

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