(Bloomberg) --
Italian bonds declined as investors faced a renewed budget standoff between the nation and the European Union after the region's elections strengthened the hand of Deputy Prime Minister Matteo Salvini.
Yields rose for a second day amid concern that the League Party's increased vote share in the EU parliamentary elections could strain the country's fragile government and spur a bond sell-off, similar to one that rattled Italy's markets last year. Bonds pared losses briefly after EU Commissioner for Economic and Financial Affairs Pierre Moscovici said he didn't favor budget sanctions.
Yields on 10-year bonds rose four basis points to 2.71%, having touched 2.73% earlier. The spread over Germany earlier hit 289 basis points, a two-week high. Two-year bond yields rose as much as 11 basis points to 0.73%.
“The election result was strong enough for Salvini that the market should price in higher political risks,” said Jan von Gerich, chief strategist at Nordea Bank. “We can easily go to 300 basis points in the 10-year spread versus Germany in the near term, but levels much higher than that would probably need further signals that Salvini intends to escalate the situation.”
The European Commission is considering proposing a disciplinary procedure for Italy next week over its failure to reduce its debt, which could pave the way for a 3.5 billion-euro ($4 billion) penalty, according to an official familiar with the matter. Yields surged in 2018 as Italy's leaders pushed up its projected deficit target, threatening to breach the bloc's 3% limit.
Salvini denied a report that he's imposed a mid-July ultimatum to his coalition partners, the Five Star Movement, to approve a range of policies. The League Party won 34% of Italy's vote in the EU elections, doubling its score from last year's general election, final results showed. Five Star was pushed into third place with 17%.
To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton
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