LONDON (Reuters) - Italy’s government bond yields fell from multi-year highs on Wednesday, as a renewed attempt to form a government in Rome and a smooth bond auction brought a degree of calm to a market battered by a political crisis.
The two anti-establishment parties, the 5-Star Movement and the League, abandoned plans to jointly take power at the weekend after the president blocked their proposed cabinet lineup. They are now trying to find a compromise, a source said on Wednesday.
Late on Wednesday, 5-Star called for eurosceptic economist Paola Savona to withdraw his candidacy as economy minister, the stumbling block in the previous effort to form a government, to help in the latest attempt.
Italy’s short-dated borrowing costs fell back below 2 percent IT2YT=RR, after surging more than 150 basis points at one point on Tuesday on fears that fresh Italian elections could strengthen the hand of anti-establishment parties.
A sale of five and 10-year government bonds also eased concerns about Italy’s ability to finance itself.
Italy sold 5.57 billion euros ($6.5 billion) in bonds, narrowly missing the top of its targeted issuance range of 3.75 billion to 6.0 billion euros.
“We are not yet at the point where investors refuse to lend money to Italy,” said Roberto Coronado, senior portfolio manager investment grade credit at PineBridge Investments. “If they had tried to borrow yesterday, it might have been harder. Today things were more stable and people were happy to lend.”
Italy’s two-year government bond IT2YT=RR tumbled 45 bps at 1.98 percent, below a five-year high touched in early European trade. A week ago it traded at just 0.20 percent.
Italian 10-year bond yields IT10YT=RR fell 7 bps to 3.03 percent, off four-year highs of 3.38 percent.
The Italy/Germany 10-year bond yield spread tightened to 269 bps having blown out to more than 300 bps briefly on Tuesday DE10YT=RR.
A political crisis has increased speculation around Italy’s continued membership of the single currency and pushed its borrowing costs up sharply.
Some analysts said that they were sceptical of the possibility of Italy leaving the euro, a fear that contributed to the Italian two-year yield recording its biggest one-day rise since 1992 on Tuesday.
“It’s questionable how credible Italy’s threat of leaving the EU actually is, if push comes to shove,” said Barclays investment strategist Hao Ran Wee, citing blocks in the country’s constitution as the main hurdle.
“No investor would lend to the Italian government if they deem it as being unable to pay back its debt,” he said.
The European Central Bank is keeping a watchful eye on the market rout and political crisis engulfing Italy, but it sees no reason to intervene at this time, sources close to the matter told Reuters on Wednesday.
As Italy’s bond market recovered, yields on safer, high-grade euro zone bonds, rose 4 to 6 bps.
Germany’s 10-year bond yields rose 6 bps to 0.34 percent, above a more than one-year low of 0.19 percent on Tuesday. DE10YT=RR
They also faced some upward pressure from inflation numbers.
German consumer prices rose by a higher-than-expected 2.2 percent year-on-year in May after an increase of 1.4 percent the month before, overshooting the ECB’s inflation target of just below 2 percent.
To view a graphic of Calm after the storm: Italy yields off highs, click: reut.rs/2JdcYcx
Reporting by Abhinav Ramnarayan and Dhara Ranasinghe; Editing by Larry King