LONDON: The gap between Italy and Germany's borrowing costs widened on Thursday, as the prospect of two radical parties leading the euro zone's third biggest economy worried investors.
The premium investors demand to hold Italian 10-year government bonds over benchmark German debt widened 2 basis points to 144 bps, and was as much as 23 bps wider than five weeks ago.
Italy has been in focus since Wednesday when the leader of the far-right eurosceptic League said a government deal with the anti-establishment 5-Star Movement was possible after March 4's inconclusive election.
Analysts said the market remained sensitive to the prospect of a populist alliance with anti-euro sympathies forming the next government in Italy.
"The chance of a government of extreme parties being formed in Italy are still low, but the size of the tail risk in Italy just got fatter," said Peter Chatwell, head of European rates at Mizuho in London.
Italian bonds also saw a marked underperformance against their southern European peers.
The gap between 10-year Italian and Spanish bond yields is at 61 basis points and close to its widest in three weeks.
The Italian/Portuguese 10-year yield gap at 21 bps , is near its widest in seven weeks.
BOND AUCTIONS
Most better-rated euro zone bonds were down up to 1 basis point on the day, as markets absorbed over 10 billions euros in new supply from Spain and France.
Germany's 10-year bond yield, the benchmark for the bloc, hit a fresh 1-1/2 month low of 0.573 basis points, as investors continued to clamour for safe-haven assets among mounting fears that growing trade tensions will hurt the global economy..
The gap between Spanish 10-year governments bonds and their German peers widened by 3.5 basis points after Spain suffered disappointing auction results. Spain sold only 4.953 billion euros in long-dated bonds, on the lower end of its target of 4.5-5.5 billion euros.
France, however, sold the maximum of its targeted 6.5-7.5 billion euros in sale that saw a surplus of demand
European Central Bank (ECB) executive board member Sabine Lautenschlaeger was scheduled to speak on Thursday.
The ECB needs further evidence that inflation is rising towards its target and will end asset buys only when it is satisfied that price growth is on a sustained path towards its objective, two of the ECB's top officials said on Wednesday.
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