LONDON: Italian government bond yields came off 14-month highs on Tuesday as the market paused after six days of heavy selling on concerns over the high-spending policies mooted by a potential coalition government in the euro zone's third-largest economy.
The likelihood of a new Italian government being formed by the 5-Star Movement and the far-right League has pushed Italian 10-year yields up nearly 70 basis points since the start of the month, potentially making the debt attractive again for some.
"We're in the realms of markets being very technical, and the fact that there's no real news overnight is an opportunity for some to add a little to their positions," said Mizuho strategist Peter Chatwell, though he cautioned against reading too much into the moves.
Italy's 10-year government bond yield fell 2 basis points to 2.32 percent, well below the 14-month high of 2.418 percent hit in earlier trade.
The closely watched Italy/Germany 10-year bond yield spread hit 189.6 bps before tightening in sharply to 175 bps by midday.
Spanish and Portuguese yields also came sharply off the multi-month highs touched on Monday, dropping 4-8 basis points.
They provide an alternative for Italian BTPs given the uncertainty around that country's future, according to Mizuho analysts.
"We expect Spanish bonds to find demand as a BTP substitute, and see best value in the five-year sector on the curve," they said in a note.
Italy's M5S and the League have proposed Giuseppe Conte, a little-known law professor, as prime minister to lead the coalition, which many fear will boost spending and raise the country's debt levels.
"Conte looks rather like a puppet for the 5-star and League leaders to push through their agenda," said Commerzbank strategist Christoph Rieger.
He added that though the programme put forward by the two parties does not appear as radical as first rumoured, it is clear that Italy is now "clearly abandoning all fiscal restraint".
The cost of insuring against Italian government debt souring was at its highest in 7 months with Italy's 5-year credit default swaps (CDS) rising to 142 bps, according to IHS Markit.
Elsewhere, higher-grade euro zone government bond yields moved 1-4 bps higher as sentiment improved across markets, and European stocks rallied as well.
The yield on Germany's 10-year government bond, the benchmark for the region, was 4 bps higher at 0.56 percent.
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