Italian government bonds fell sharply in early trading Monday, after Prime Minister Mario Monti said he plans to resign once Italy's 2013 budget is approved, clouding efforts to tackle the euro-zone debt crisis and injecting further political uncertainty.
The decision by Mr. Monti, who is seen as a safe pair of hands for Italy's finances, will likely pave the way for an Italian election in February--a possibility that has pushed Italy's 10-year bond yield nearly a quarter of a percentage point higher to 4.75%, its highest level in nearly two weeks.
Monti's hand was forced after former Prime Minister Silvio Berlusconi's party withdrew its support for the technocratic government. Mr. Berlusconi also indicated he wanted to return to politics. The current parliamentary term was due to expire before the end of April, but Mr. Monti's early resignation will hasten a return to the polls.
These latest twists in Italian politics have overshadowed a mixed result to Greece's bond buyback, which will be reopened until Tuesday in order to reach its target after failing to do so by Friday's deadline.
The weakness in Italian bonds also spilled over into Spanish bonds, with 10-year yields climbing 0.10 percentage points to 5.59%, according to Tradeweb.
The resulting flight to safety boosted those bond markets perceived to be safer by investors, helping French 10-year yields to a new record low of 1.92%.
"The election itself is not a novelty but an event well known to everybody and we had already signaled this as a source of volatility in recent months. Now the time for volatility has come," said Luca Cazzulani, a fixed-income strategist at Italian bank UniCredit.
"We would be prepared for some further weakness until [Italy's bond] auction on Thursday," Mr. Cazzulani added.
Mr. Monti, who was appointed to his role in November last year has kickstarted a series of economic reforms in Italy, helping the country to regain the confidence of investors. Under his tenure, after taking over from Mr. Berlusconi, Italy's 10-year yields have dropped from a high of more than 7% to a low of 4.38% earlier this month.
The early market moves Monday extend the weakness in Italian and Spanish bonds seen last week, which came despite the supportive backdrop of the European Central Bank's promise to buy bonds in the secondary market, which has calmed euro-zone bond markets since late summer.
Some analysts said that any selloff in lower-rated debt could be limited with the ECB still poised to intervene.
"Spreads could face some short term upside risks. Yet, the medium term picture for us remains one where ECB support trumps these downside risks," said interest rate strategists at RBC Capital Markets.
Also reflecting the news of Monti's plans, the euro was a little weaker against all its major peers Monday, slipping below the $1.29 level against the greenback and sinking to the day's low against the Japanese yen as investors sold European assets.
"The new combination of Monti stepping down and Berlusconi standing for office is putting pressure on the euro," said Commerzbank in a note to clients.
The single currency traded at $1.2897 compared with $1.2925 late Friday in New York, according to EBS via CQG. It was at Y106.24 from Y106.65.
-Write to Tommy Stubbington at [email protected]
(Eva Szalay in London contributed to this article.)
The decision by Mr. Monti, who is seen as a safe pair of hands for Italy's finances, will likely pave the way for an Italian election in February--a possibility that has pushed Italy's 10-year bond yield nearly a quarter of a percentage point higher to 4.75%, its highest level in nearly two weeks.
Monti's hand was forced after former Prime Minister Silvio Berlusconi's party withdrew its support for the technocratic government. Mr. Berlusconi also indicated he wanted to return to politics. The current parliamentary term was due to expire before the end of April, but Mr. Monti's early resignation will hasten a return to the polls.
These latest twists in Italian politics have overshadowed a mixed result to Greece's bond buyback, which will be reopened until Tuesday in order to reach its target after failing to do so by Friday's deadline.
The weakness in Italian bonds also spilled over into Spanish bonds, with 10-year yields climbing 0.10 percentage points to 5.59%, according to Tradeweb.
The resulting flight to safety boosted those bond markets perceived to be safer by investors, helping French 10-year yields to a new record low of 1.92%.
"The election itself is not a novelty but an event well known to everybody and we had already signaled this as a source of volatility in recent months. Now the time for volatility has come," said Luca Cazzulani, a fixed-income strategist at Italian bank UniCredit.
"We would be prepared for some further weakness until [Italy's bond] auction on Thursday," Mr. Cazzulani added.
Mr. Monti, who was appointed to his role in November last year has kickstarted a series of economic reforms in Italy, helping the country to regain the confidence of investors. Under his tenure, after taking over from Mr. Berlusconi, Italy's 10-year yields have dropped from a high of more than 7% to a low of 4.38% earlier this month.
The early market moves Monday extend the weakness in Italian and Spanish bonds seen last week, which came despite the supportive backdrop of the European Central Bank's promise to buy bonds in the secondary market, which has calmed euro-zone bond markets since late summer.
Some analysts said that any selloff in lower-rated debt could be limited with the ECB still poised to intervene.
"Spreads could face some short term upside risks. Yet, the medium term picture for us remains one where ECB support trumps these downside risks," said interest rate strategists at RBC Capital Markets.
Also reflecting the news of Monti's plans, the euro was a little weaker against all its major peers Monday, slipping below the $1.29 level against the greenback and sinking to the day's low against the Japanese yen as investors sold European assets.
"The new combination of Monti stepping down and Berlusconi standing for office is putting pressure on the euro," said Commerzbank in a note to clients.
The single currency traded at $1.2897 compared with $1.2925 late Friday in New York, according to EBS via CQG. It was at Y106.24 from Y106.65.
-Write to Tommy Stubbington at [email protected]
(Eva Szalay in London contributed to this article.)