* Worries over early elections, ECB withdrawal hit Italian
* Italy-Spain bond yield gap close to widest since 2012
* Spanish resolution of failing bank contrasts with Italian
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, June 7 The gap between Italian and
Spanish 10-year bond yields was heading towards its widest level
since the 2012 debt crisis on Wednesday, as investors fretted
over possible early elections and the effect of tighter policy
on Italian borrowing costs.
The similarly-rated Southern European neighbours are often
compared in the bond market, and the difference in their
government bond yields used as a measure of risk in the bloc.
As the Italian debt agency prepared to sell 30-year bonds
later in the day, Italy's benchmark 10-year debt
underperformed the rest of the euro zone bond market.
While the bond sale may have marginally exacerbated the
effect, Italian yields have been rising in recent weeks on
political worries, expectations of a move away from
extraordinary European Central Bank monetary stimulus and
concerns over banking system.
"The Italian long-end spreads are being hit by the 30-year
deal, but overall it's more the focus on politics that is making
the bonds weaker," said ING strategist Benjamin Schroeder.
"The Italian parliament is voting on a new electoral system
which means we could have elections in September - that could
coincide with the ECB's timeline for normalising its policy," he
Italy's Constitutional Affairs Committee on Monday signed
off on a new electoral law after the main parties reached a deal
which could pave the way for a national election in the autumn.
In addition, the ECB meets on Thursday and is widely
expected to take a small step towards normalising policy by
ruling out the introduction of further stimulus.
Italy is seen as one of the biggest beneficiaries of the
ECB's current ultra-loose policy.
Most high-grade euro zone bond yields were unchanged, but
lower-rated southern European bonds underperformed, their yields
rising 2-3 basis points.
The Italian 10-year yield spread over Germany -- the
benchmark for the region -- hit 201.7 basis points on Wednesday,
the widest since April 21.
The Italy-Spain bond yield spread, at 74 bps, was just 1
basis point off its March peak, when the gap was at its widest
since the euro zone debt crisis in February 2012.
The move came after the European Commission approved the
sale of struggling Spanish lender Banco Popular to
Santander as a way of preventing Popular going into
The quick resolution of this banking issue contrasts sharply
with Italy, where several banks are struggling with a bad loans
crisis. Rescue proposals are yet to be approved because they may
transgress rules preventing a state bailout of banks. The rescue
of Banco Popular did not involve state aid.
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(Reporting by Abhinav Ramnarayan, editing by Louise Heavens)