Italian bond yields spike as spectre of early elections rises

Italian government bond yields hit their highest level in more than six weeks on concern over political instability after the Constitutional Court ruled that the voting system was invalid, paving the way for early elections. Lawmakers from Italy's anti-establishment 5-Star Movement on Wednesday called for immediate elections after the ruling.
Italy's 10-year government bond yield ticked up 2 basis points (bps) to 2.11 percent, pushing its gains for the day to 9 bps. The spread over Spanish equivalents was at 56 bps, its widest close since February 2012.
Rabobank strategist Lyn Graham-Taylor said it was still unlikely that 5-Star would take power given their support is at about 28 percent in opinion polls.
"However, the flip side is that it also means that Italian governments will likely continue to be formed of disparate coalitions and so it will remain difficult to implement reforms," he said.
The yield on Portugal's 10-year government bond
meanwhile hit 4 percent for the first time in two weeks after the ruling, up 15 bps on the day. Investors tend to sell lower-rated "peripheral" euro zone bonds when there are any concerns over the future of the single currency bloc.
Snap elections in Italy would add to the list of countries in the bloc going to the polls this year that have put political risk firmly in the spotlight following anti-establishment votes that rocked the US and Britain last year.
German yields hit six-week highs on Wednesday, as hopes that US President Donald Trump will push ahead with fiscal spending reignited reinflation bets and an ECB official said the central bank may start planning an exit from its stimulus programme.
Euro zone bond markets also faced pressure from new supply, with Germany selling 30-year debt and euro zone bailout fund, the European Stability Mechanism selling 3.5 billion euros of 30-year bonds.
Strong gains in world stocks, fuelled by Trump's economic policies, dented demand for safe-haven debt.
Trump signed two executive orders on Tuesday to move forward with building the Keystone XL and Dakota Access oil pipelines, rolling back major Obama administration environmental actions in favour of expanding energy infrastructure.
He also met with the heads of US automakers to push for more cars to be built in the United States.
"The fact that Trump is taking action, such as the pipeline deals, has raised confidence that he will fulfil other parts of the economic policies he's flagged," Credit Agricole European fixed income strategist Orlando Green said.
The 10-year Bund yield, the benchmark for borrowing costs in the euro zone, rose 7 bps to 0.40 percent, its highest level in six weeks.
French 10-year bond yields climbed to a one-year high at around 0.98 percent, while other euro zone equivalents were 7-10 bps higher on the day.
Analysts said debt markets were also unnerved by comments from ECB Executive Board Member Sabine Lautenschlaeger.
She said on Tuesday the ECB could start planning an exit from its unprecedented stimulus programme in a rare public discussion about ending the bond-buying scheme.