(Bloomberg) --
Italian bonds declined after a report that Deputy Prime Minister Matteo Salvini is threatening to bring down the government unless his demands for changes in the cabinet are met.
The 10-year yield premium over Germany, a key gauge of risk in the Mediterranean nation, climbed toward the widest level in a month. The newspaper Corriere della Sera reported that Salvini has given Prime Minister Giuseppe Conte until Monday to replace some cabinet members including Finance Minister Giovanni Tria, who is seen as a brake on the coalition’s spending plans.
“It was Salvini saying if he doesn’t get his own way, the coalition isn’t for him,” that drove Italian bonds down, said Lyn Graham-Taylor, senior rates strategist at Rabobank International. “We like tighter peripheral spreads.”
The sell-off underscores the fact that investor sentiment toward the populist government still remains fragile, even after a global hunt for positive yields fueled a rally in the nation’s bonds in recent months. While the 10-year debt of peers such as Portugal and Spain now yield close to nothing, Italy’s still offers a yield of about 1.5%.
The yield spread over Germany rose by as much as nine basis points to 2.09%, before paring the increase to four basis points. The 10-year yield was up five basis points at 1.47%, after touching a high of 1.53%. The two-year rate rose three basis points to 0.004%. Volumes in futures were running at around 150% of the 10-day average.
Japanese investors bought a record amount of Italian bonds in June, according to the Asian nation’s balance-of-payment data released Thursday. Italy faces a credit review by Fitch Ratings Friday, which currently ranks the country two notches above junk. Both Danske Bank AS and Societe Generale SA both expect no change in ratings.
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