2018.05.2922:18:00UTC+00Italy Bond Market Suffers Steep Sell-Off on Political Turmoil

Italy's bond market saw a steep sell-off on Tuesday, sending the yield on the country's two-year bond to the highest level in over four years as concerns about political turmoil in the country intensify.

The yield on two-year Italian debt broke through 2.7 percent for the first time since 2013, hitting as high as 2.73 percent, up almost two percentage points from Monday's market close. The yield on 10-year debt reached 3.388 percent, up 70 bps from the previous close. Yields rise when prices drop.

Investors have been selling Italy's bonds and equities after the country's president, Sergio Mattarella, frustrated a bid by the Five Star Movement and League to form a coalition government. Investors fear that his move will trigger new elections that might give a more explicitly Eurosceptic mandate to the two populist parties.

Italian stocks also fell on Tuesday with the benchmark index, the FTSE MIB, losing three percent at one point before retrenching somewhat to 2.2 percent down on the day.

Ignazio Visco, the governor of the Bank of Italy, warned that the country was “a few short steps away” from losing the “asset of trust”.

In a sign of investors' nerves, the gap in yield between Italy's 10-year bond and German Bunds of the same maturity, a key measure of perceived risk of Italian bonds, rose to 314 bps, up from 234 bps on Monday.

The weakness in Italian markets has begun to feed through into other eurozone periphery nations' debt yields. The 10-year Portuguese yield rose by 31 bps; the Spanish equivalent saw a 14bp move.

Selling also hit the currencies market, with the euro falling 0.89 percent. It stood below $1.16 for the first time since November 2017.