Article Highlights

  • Italian yields off 14-month highs, down 4 bps on day
  • Coalition proposes novice as PM
  • Eurosceptic as economy minister - report
  • Spanish, Portuguese debt yields ease
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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 70 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, coming off 14-month highs of 2.418 percent.

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. The 10-year yield briefly rose almost four bps after the report.

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 stood 5 bps lower by 1355 GMT at 0.22 percent, having fallen as much as 10 basis points earlier in the day.

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 180 bps, widening after having tightened to around 171 bps earlier.

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

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

“At least for now, we see the search-for-yield dynamic prompted by the ECB’s non-standard monetary policy measures as sufficient to avoid a return to the extreme tensions of 2011-12,” Goldman Sachs wrote, referring to European Central Bank bond-buying.

Spanish and Portuguese bond yields meanwhile, remain well below the multi-month highs touched on Monday. Spanish 10-year yields were down 4 bps at 1.48 percent. .

Germany’s 10-year bond yield, which tends to fall when regional risks rise, was 2.3 bps higher at 0.54 percent .

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

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.