Italy bond yields stabilise after surge on report Di Maio to quit

• Di Maio will step down as leader of Italy's co-governing 5-Star movement on Wednesday.
• The populist party, the largest in the ruling coalition, has been hit by rising defections and plummeting poll ratings.
• The largest in the ruling coalition, has been hit by rising defections and plummeting poll ratings.

LONDON: Italy's bond yields rose on Wednesday, widening the gap over safer German peers, on reports that Luigi Di Maio will step down as the 5-star movement's leader, but sentiment stabilised as an imminent collapse of the ruling coalition was seen as unlikely.

Di Maio will step down as leader of Italy's co-governing 5-Star movement on Wednesday, a senior party source said. He is also the country's foreign minister.

While his resignation is not expected to bring down the government, it would underscore deep divisions within 5-Star.

The populist party, the largest in the ruling coalition, has been hit by rising defections and plummeting poll ratings.

In early trade, Italian government bond yields jumped as much as 8 basis points, as prices tumbled, before pulling back.

The benchmark 10-year Italian bond yield was last up 6 bps on the day at 1.43pc, off session highs.

The closely-watched spread between 10-year yields on Italian bonds and comparable German debt was at 166 bps -- having hit its widest since late December at 169 bps.

"The important point to highlight is that the mood has modestly recovered," said Luca Cazzulani, a rates strategist at UniCredit in Milan.

"The initial reaction was to sell because of the heightened political uncertainty but there is no outright link between Di Maio's resignation and a collapse of the government."

Others pointed out that weak poll ratings for the two parties in the ruling coalition, which includes the left-wing Democratic Party, in contrast to the popularity of the far-right League Party, left little motivation to call a fresh vote.

"Neither of the two parties currently in government have a major incentive to call early elections," analysts at Rabobank said in a note. "Given this interpretation, we would fade this morning's widening in the Italian bond spread versus Germany."

Analysts said the selloff in Italian bonds was also used as opportunity to move back into the higher-yielding debt market given the fact that much of the European bond market is in negative yield territory.

Yields on Italian debt had surged by their most in more than a month, though the early selloff in Italian bonds looked contained, with government debt in the rest of the European bond market complex broadly steady.

Investors were also wary of changing bond positions aggressively before a European Central Bank policy meeting on Thursday.

The ECB's first meeting of the year is set to bring the formal launch of a strategy review, most likely including a rethink of an inflation goal the bank has failed to meet since 2013.

Sentiment in safe-haven bond markets meanwhile has been supported this week by reports of an outbreak of the coronavirus in China, where the death toll rose to nine and authorities reported a surge in new cases.

Germany's 10-year Bund yield was steady at -0.24pc .