* Italy-Germany bond yield spread widens to 110 bps
* German yields dip for second day in a row
* Euro zone periphery govt bond yields (Rewrites top to reflect move in prices, adds quote and graphic)
The gap between Italian and German government bond yields was at its widest level in over a month on Thursday amid worries over the political ructions in Rome as the country grapples with an economic slowdown.
Italy’s former premier Matteo Renzi pulled his small party out of government on Wednesday, stripping the ruling coalition of its parliamentary majority and triggering political chaos while the nation battles a resurgent COVID-19.
A new election would likely be avoided by Prime Minister Giuseppe Conte, but political uncertainty will remain in the near future, analysts said.
“The Italian political crisis snaps the string of the relentless rally we have had since last spring (in Italian bonds). We could see a bit more widening in the coming weeks if the political uncertainty remains,” said ING rates strategist Antoine Bouvet.
“That said, we are not expecting new elections and the ECB’s purchase programme will put a lid on any massive moves,” he added.
Italian government bond yields rose between 4 and 7 basis points across the curve, with the benchmark 10-year bond yields rising 6 bps to 0.617%.
The closely-watched spread between German and Italian 10-year yields were at their widest level in over a month at 116 bps.
Italy also sold 9.25 billion euros in a bond auction on Thursday, potentially putting further upward pressure on yields. Yields tend to rise during large bond sales as investors sell outstanding debt to make space for the new supply.
After recording their biggest drop since Sept. 11 on Wednesday at 5.2 bps, German 10-year government bond yields, the benchmark for the region, fell another 1.5 bps to -0.535% on Thursday.
The moves on German Bunds run counter to other major government bonds around the world, where yields have been pushed up by the promise of a big stimulus package from U.S. President-elect Joe Biden.
In addition, a higher-than-expected inflation figure in the United States may have put some upward pressure on U.S. Treasury yields, though Federal Reserve officials did push back against the possibility of tightening policy for now.
U.S. 10-year Treasury yields were up about 2 bps at 1.11% on Thursday morning.