Italian Bonds Slide for Second Day After EU Vote Boosts Salvini

(Bloomberg) -- Italian bonds declined as investors faced a renewed budget standoff between the nation and the European Union after the region’s elections strengthened the hand of Deputy Prime Minister Matteo Salvini.

Yields jumped for a second day amid concern that the League Party’s strong performance in the EU parliamentary vote could strain the country’s fragile government and spur a bond sell-off, similar to one that rattled Italy’s markets last year. Salvini denied a report that he’s imposed a mid-July ultimatum to his coalition partners, the Five Star Movement, to approve a range of policies.

Yields on 10-year bonds rose six basis points to 2.73% as of 8:45am London time, with the spread over Germany touching 289 basis points, a two-week high. Two-year bond yields rose nine basis points to 0.70%.

“The election result was strong enough for Salvini that the market should price in higher political risks,” said Jan von Gerich, chief strategist at Nordea Bank. “We can easily go to 300 basis points in the 10-year spread versus Germany in the near term, but levels much higher than that would probably need further signals that Salvini intends to escalate the situation.”

The European Commission is considering proposing a disciplinary procedure for Italy next week over its failure to reduce its debt, which could pave the way for a 3.5 billion-euro ($4 billion) penalty, according to an official familiar with the matter. Yields surged in 2018 as Italy’s leaders pushed up its projected deficit target, threatening to breach the bloc’s 3% limit.

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