Italy’s Politics Get Real for Bonds

All of a sudden politics matters to Italian bonds. Disruption around an election process that was never smooth to begin with drove 10-year yields up 10 basis points on Tuesday to 1.85 percent, the highest level for six weeks.

In the process most of the spread tightening to German bunds since the March 4 election went away.

All attempts to cobble together some form of coalition since the inconclusive vote have failed. And now the president’s latest proposals for a neutral prime minister have been rejected by both the populist Five Star movement and the League.

Five Star is agitating for fresh elections as soon as July. The League has also backed a return to the polls if the parties can’t reach a last-ditch compromise.

While it would be unprecedented for a second election to occur so soon, it may become impossible for President Sergio Mattarella to resist if all the other constitutional options fall away.

The president’s main concern has been the safe passage through parliament of…

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