Italy's borrowing costs surge
Italy's borrowing costs surged further on Monday and its stock market touched six-week lows as two anti-establishment parties that plan to ramp up spending appeared set to form a coalition government.
The 5-Star Movement and League will seek the Italian president's backing later in the day for their choice of prime minister, expected to be Giuseppe Conte, a university professor. He would lead a coalition seeking billions of euro in tax cuts, additional welfare spending and a roll-back of pension reforms.
The prospect of a spendthrift government taking shape in Italy, the eurozone's third-biggest economy and its most indebted after Greece, has rattled markets. The euro headed for a sixth day of declines.
Italian two-year bond yields jumped more than 10 basis points to 0.23pc, their highest since December 2016, before pulling back in afternoon trade to 0.17pc. A week ago, that yield was at minus 0.11pc.
The gap between 10-year Italian and Spanish bond yields was at 81 basis points - the widest since 2012, when the euro area was starting to emerge from a debt crisis.
As 10-year Italian debt yields hit almost 2.30pc, and the gap over benchmark German Bund yields pushed out to 175 bps - the widest since October.
"If this is the government we're going to get, the Italian/German bond spread north of 180 bps is certainly a possibility," said Patrick O'Donnell, investment manager at Aberdeen Asset Management.
"There is focus on the individual names of the government and that may be a positive if they are seen as mainstream, but at the end of the day we are going to get a programme that is very confrontational with Brussels and mean more BTPs (Italian bond) issuance."