Southern European government bond yields have underperformed the core this week with analysts citing anti-austerity rhetoric -- as well as risk-aversion on the back of the U.S./China trade war -- as a primary driver.

Short-dated Italian government bond yields were the clear underperformer and extended the sharp rise seen on Tuesday after deputy prime minister Matteo Salvini said that Rome was ready to break EU fiscal rules.

Two-year government bond yields jumped nearly eight basis points in early trade to 0.80 percent, the highest since December 2018.

Italy's 10-year government bond yield also rose to new 2-1/2 month highs and was last up four basis points on the day to 2.78 percent.

This is not the first time an Italian politician has challenged EU budgetary rules; as recently as last week Salvini said that Rome was ready to push Italy's budget deficit above the EU's 3% ceiling.

But Salvini's comments came at a time of heightened sensitivity to Italian risk due to the proximity to the European elections, heightened tensions within Italy's ruling coalition, the U.S. trade war with China, and after a lacklustre bond auction.

The comments also elicited a further show of discord between the ruling parties when Salvini's coalition partner and leader of the 5-Star Movement Luigi di Maio told reporters it was "pretty irresponsible" to create market tensions by speaking about increasing the high debt level.

He said the coalition should focus on cutting spending and cracking down on tax evasion.

Investors had hoped that a break-down in the coalition would result in a more fiscally prudent right-wing government, but Salvini's latest comments are a deviation from this.

"This is not good news especially after the rumours of a break up of the ruling coalition after the European election," said Daniel Lenz, rates strategist at DZ Bank.

"...Now with Salvini saying he would also not care about the three percent threshold, the hope of a right wing government sticking to the rules is fading."

German government bond yields fell to new 2-1/2 year lows and were last down 2.6 basis points at -0.098 percent after data showed the bloc's largest economy had returned to growth in the first quarter while China's showed signs of weakness.

The German economy returned to growth in the first quarter, helped by higher household spending and a booming construction industry, preliminary data showed on Wednesday.

But the increase is probably not the beginning of a sustained recovery in Germany's economy, wrote analysts from Capital Economics in a note.