Italian BTP yields jump on political uncertainty fears

MILAN: Euro zone government bond yields rose, with Italian borrowing costs rising by more than 8 basis points on fears of more political uncertainty in Italy.

Italian Prime Minister Giuseppe Conte will not try to forge a new government with the Italia Viva coalition party if it follows through on a threat to quit the cabinet, a source in Conte's office said on Tuesday.

Italia Viva could bring down Conte's government and unleash political chaos on Italy as it struggles to contain the COVID-19 pandemic.

Italy's 10-year bond yield was up 8.5 basis points at 0.629%, after hitting its highest since Dec. 2.

"The clash between Prime Minister Giuseppe Conte and the head of the Italia Viva party, Matteo Renzi is reaching its peak," Erjon Satko strategist at BofA said.

"Some headlines are weighing heavily on Italian government bond prices. Market is worried about any development that could lead to a euro-sceptic policy in Italy," he added.

"Snap elections are still unlikely, but risk has increased," Citi analysts said in a research note.

Bond prices in Europe remained supported by the European Central Bank (ECB) backstop as coronavirus restrictions continue to weigh on the economic outlook, while reflation trade is pushing US Treasury yields higher.

ECB board member Isabel Schnabel reaffirmed the central bank's dovish stance, saying that a short-term rise in inflation will not affect monetary policy decisions, which are geared towards the medium term.

Atlanta Federal Reserve Bank President Raphael Bostic on Monday said he is not "super concerned" about the rise in 10-year yields, adding that it is not something to which the Fed needs to react.

Germany's benchmark 10-year Bund yield was up 2 basis points at -0.473% after hitting a two-month high on Monday.

"Concerns about a more pronounced sell-off in US Treasuries keep dominating. "Bunds and European government bonds seem no longer immune to these dynamics," Commerzbank analysts said in a research note, adding that the steady pace of ECB purchases is being met by rising net supply.

Analysts expected the central bank to buy an amount of bonds broadly in line with the January net supply, which was estimated at around 150 billion euros ($182.2 billion).

Markets will focus on a US 10-year auction as well as on Fed speakers, including Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, who are regarded as being at the neutral to hawkish end of the spectrum.