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Italy uncertainty keeps euro zone bond markets on edge
February 13, 2017 / 8:54 AM / 10 months ago

Italy uncertainty keeps euro zone bond markets on edge

* Italy’s Renzi expected to trigger leadership race

* Euro zone periphery yields

By Dhara Ranasinghe

LONDON, Feb 13 (Reuters) - Italy led euro zone bond yields higher on Monday as former Italian prime minister Matteo Renzi looked set to trigger a leadership contest of his ruling Democratic Party, highlighting political risks in the bloc’s third biggest economy.

Heightened political uncertainty in the euro area has been a major driver of bond yields so this year, with investors rattled by a strong showing for far-right, eurosceptic presidential candidate Marine Le Pen in April’s French election.

Dutch voters go to the polls in March, while Germany holds elections in September.

But on Monday, Italy was the focus ahead of a Democratic Party meeting later in the day. Renzi is expected to play a disruptive card by stepping down and sparking a leadership bid which could imply months of campaigning.

A leadership context could delay the early election Renzi has pushed for since he quit as prime minister after a referendum defeat in December.

Italy is not scheduled to go the polls until early 2018 but opposition parties including the Five-Star Movement - Italy’s largest opposition group - and the anti-immigration Northern League are also calling for an early vote.

“The problem in Italy is that there is bit of chaos in that the Democratic Party itself doesn’t have a united view on whether it wants snap elections,” DZ Bank strategist, Daniel Lenz, said. “We have this meeting today and we do not know the outcome, so that is having a negative impact.”

Italy’s 10-year bond yield rose 3 basis points (bps) to 2.29 percent, keeping the gap over top-rated German bonds close to three-year highs near the 200 bps hit last week.

Other euro zone bond yields were 1-2 bps higher, although safe-haven German Bund yields were steady at 0.33 percent - not far off 2-1/2 week lows hit last week.

Analysts said German bonds were also supported by broader geopolitical worries after a missile test by North Korea at the weekend.

Greece was also a source of concern, weighing on risk sentiment in the euro zone.

Initial optimism that the International Monetary Fund and Greece’s euro zone lenders had narrowed some differences over a bailout package was tempered over the weekend.

A senior European Union official said on Sunday that Greece and its lenders should quickly approve a review of reforms the country must take in return for unlocking new loans, warning of financial instability in the euro zone if the issue lingers.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Editing by Louise Ireland)

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