- This closely-watched spread had tightened to below 100 basis points for the first time ever earlier this month.
LONDON: Germany's 10-year government bond yield dropped to a two-week low in early trade on Tuesday on political turmoil in Italy and falling Asian stock markets worried about US fiscal stimulus.
Italian Prime Minister Giuseppe Conte will hand in his resignation to the head of state on Tuesday, Conte's office said, on hopes President Sergio Mattarella will give him a mandate to form a new government.
While the resignation may allow an election to be avoided in Italy, the combination of political worries and stock market jitters over US fiscal stimulus bolstered demand for safe havens such as German Bunds.
Asian stocks declined on Tuesday, retreating from record highs as lingering concerns about potential roadblocks to the Biden administration's $1.9 trillion stimulus weighed on sentiment.
"If Conte does manage to form a new government within a week with a stable majority, then the potential spread tightening is significant; but it is still political gamble at this point," said ING rates strategist Antoine Bouvet.
"There's also a globalised move for lower yields as it is not going to be straightforward to pass such an ambitious fiscal package (in the United States), and we still have a long way to go on the vaccination drive across the world," he added.
Germany's 10-year bond yield fell a basis point to a two-week low of -0.561%, while the Italy-Germany bond yield spread was wider at 120.5 basis points.
This closely-watched spread had tightened to below 100 basis points for the first time ever earlier this month.
Demand for German Bunds also comes as US 10-year Treasury yields dropped to a three-week low of 1.028% earlier in the session as the US Senate pushes to pass its COVID-19 bill.
Later in the session, Italy is set to sell inflation-linked bonds via auctions and the Netherlands is scheduled to sell up to 3 billion euros of short-dated debt.
The European Union, meanwhile, has started marketing the sale of a seven-year benchmark bond issue and a tap of its outstanding 2050 debt via syndication.