LONDON: Italian government bonds headed back towards three month highs on Tuesday in volatile session driven by domestic political concerns, and trading on the Italian futures market.
Italian 10-year yields reached 3.19 percent despite comments from Italian Economy Minister Giovanni Tria that the Chinese government has no concerns about a recent widening of the spread of Italian government bonds over Germany's 10-year benchmark bond.
The Chinese government is a major holder of euro zone debt but their support did little to alleviate the upward pressure on Italian yields.
Italian 10 year spreads reached their highest level since the May 29 sell-off in early trade on worries over government spending, but fell momentarily with analysts pointing to buying in the Italian futures market as the likely driver. The price of 10-year BTP Futures rose sharply from 0900 GMT onwards.
"There is no real liquidity in the cash bond market, so very likely this is BTP futures driven by some account either closing a short position or taking a bullish bet on Italy at these current prices," said BBVA strategsit Jaime Costero Denche.
"This is why the movement in Italian bonds is led by the 10-year sector," he added.
Italian 10-year government bond yields were the biggest mover as the session wore on, with yields 5 basis points lower on the day at 3.12 percent and 10 bps lower than the day's peak.
The head of Italy's debt agency, Davide Iacovoni, recently said the May 29 sell-off -- one of the worst days for Italian bonds in more than 25 years - was partly driven by futures trading.
However, yields remain within touching distance of the months-long highs hit earlier in the session with concerns about Italian public finances still prevalent.
Deputy Prime Minister Luigi Di Maio told an Italian newspaper that Italy's public deficit could exceed the European Union's ceiling of 3 percent of gross domestic product next year.
Separately, Di Maio also threatened in a Facebook post to veto the EU's seven-year budget plan if the bloc did not do more to share the burden of migrant arrivals.
The concern over Italian public spending is rooted in the country's already-high debt levels. With a debt-to-GDP ratio of more than 130 percent, it ranks as the most indebted nation in the 28-nation EU after Greece.
There are also concerns over Italy's credit rating, with each of the three main ratings agencies due to review it in the coming weeks.
Higher-grade euro zone government bond yields were unchanged on the day, holding on to Monday's sharp rises.
German 10-year borrowing costs, the benchmark for the region, were a shade lower at 0.38 percent, hovering near the two-week high hit on Tuesday on optimism over global trade and on indications of a strengthening euro zone economy.
The United States and Mexico agreed on Monday to overhaul the North American Free Trade Agreement, putting pressure on Canada to agree to new terms on auto trade and dispute- settlement rules to remain part of the three-nation pact.
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