LONDON: Italian government bond yields hit six-week highs on Monday, bucking a broader fall in euro zone debt yields, before a hearing on the legitimacy of new electoral law.
Germany led most euro zone bond yields lower as new U.S. President Donald Trump's early tone injected a dose of uncertainty into world markets, lifting demand for safe-haven debt.
But in Italy, caution crept in before Tuesday's Constitutional Court hearing on a disputed electoral law.
The referendum rejected by voters on Dec. 4 would have eliminated Italy's upper house, the Senate, which has a proportional voting system, while a first-past-the-post law was approved for the lower house in 2015.
This lower house law is being challenged in the court, although it remains unclear whether there will be a definitive ruling this week.
Italy's usually tight-lipped president has said Italy must adopt a new electoral law before a national vote can be called -- something many party leaders urged after last month's referendum prompted former premier Matteo Renzi to step down.
"The Italian hearing is important because it will probably set in motion the process where they change the electoral law, which is a necessary condition for calling a snap election," said ING senior rates strategist Martin van Vliet.
Italy's 10-year bond yield rose 1 basis point to 2.04 percent, a six-week high. That pushed the gap over top-rated German Bund yields to 170 bps, its widest since early December.
Germany's 10-year Bund yield fell 2 bps to 0.34 percent , holding below Friday's one-month high of 0.36 percent. Most other euro zone yields were down a similar amount.
Broader euro zone bond markets drew support after Trump struck a protectionist tone in his inauguration speech on Friday, undermining optimism over the U.S. economic outlook spurred by his promises of tax cuts and fiscal expansion.
The dollar fell to 1-1/2 month lows against a basket of other major currencies, European stocks opened lower and U.S. Treasury yields fell.
Expectations that Trump will deliver policies such as tax cuts and increased infrastructure spending that would boost the economy and inflation have on the whole pushed global bond yields higher since November's election.
But Friday's "America First" inauguration speech has raised some concern about the priority such policies will now take, leading investors to rethink reflation trades.
"Even Treasury yields are down... as investors worry about protectionism and what a deeply unpopular president will mean for national unity and international diplomacy over the next four years," said City Index research director Kathleen Brooks.
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