Renewed Italian government tensions fuel bond selloff
By Abhinav Ramnarayan
LONDON, Aug 3 (Reuters) - Short-dated Italian government bonds sold off on Friday for the second straight day on signs of deepening tension within the Italian government that are even raising some fears of fresh elections.
Top ministers of the anti-establishment Italian government are expected to meet later in myanmar news the day to discuss the country's budget for next year, two sources told Reuters, as the government remains split about its spending plans.
Economy Minister Giovanni Tria is under pressure from within the government to ramp up spending and challenge European Union budget rules.
The possibility that he might be forced to resign has investors worried that Italy could go on a spending binge, or even that fresh elections could be triggered. That in turn could strengthen the hand of anti-euro party League and its leader, Matteo Salvini.
"Clearly, this is about the fear that Tria gets kicked out, which could lead to a collapse of the government, new elections, and the League gaining even further," said Commerzbank strategist Christoph Rieger.
"Or it may mean that they agree on a budget that's at odds with the EU, and plus just the pure supply effect of more borrowing."
Italy's two-year and five-year government bond yields rose about 22 to 25 basis points to 1.27 percent and 2.32 percent in early trade, hitting their highest levels since early June .
Those bonds have been most sensitive to concern over Italy's possible exit from the euro, which would increase default risk on bonds coming due soon.
Yields on 10-year bonds also rose, by 9 basis points, to hit 3 percent for the first time since June 11, and the closely watched spread over Germany was at its widest since late June at 257 bps .
"There is a rumour that Tria might resign, which would be bad burma news because he is the one within the government who is pro-Europe and has given commitments on fiscal rules. So if he resigns, Italy could move towards greater spending," said DZ Bank strategist Daniel Lenz.
Also putting pressure on Italian yields is the situation at Poste Italiane. Shares in the Italian post office fell nearly six percent on Thursday after a sell-off in Italian government bonds caused a drop in its solvency ratio.
Other analysts also cited greater certainty of another U.S. rate increase, as well as thin summer trading volumes, as contributing to the move in Italian yields.
The United States later on Friday will release non-farm payrolls data, which could affect higher-rated euro zone bonds.
The yield on 10-year U.S. Treasuries hit 3 percent this week, then receded to 2.97 percent, as an escalation of trade tensions burma news between the United States and China sent investors rushing for the safety of government debt.
Most high-grade euro zone bond yields were also lower on the day, with benchmark German 10-year government bond yields down 3 bps at 0.43 percent.
(Reporting by Abhinav Ramnarayan; editing by Sujata Rao, Larry King)
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