LONDON — German government bond yields dipped and the Italy-Germany bond yield spread widened on Thursday amid worries over the political situation in Italy, where new elections may prove necessary even 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 may not be the only course for Prime Minister Giuseppe Conte, but political uncertainty will remain for the foreseeable future, analysts said.
“President (Sergio) Mattarella may give Conte or some other figure the mandate to try and form a new coalition. Such an alliance could be very similar in composition to the existing coalition or it may try to engage other parties across the Parliament,” Mizuho analysts said in a note.
“Regardless how this is resolved, (Italian) BTPs should be pricing in greater political risk ahead.”
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 basis point to -0.532% on Thursday.