The pressure on Italy is just getting started

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Reuters/Jason Cairnduff

  • Italian President Sergio Mattarella rejected the euroskeptic economist and former banker Paolo Savona for finance minister, an action that may set up a new election.
  • Italian bond yields are surging amid the political uncertainty.
  • Citi says yields could go a lot higher from here.

Italian yields surged Tuesday morning amid growing political turmoil in Italy after President Sergio Mattarella rejected the euroskeptic economist and former banker Paolo Savona for finance minister. Now Mattarella must form a new government or call for another election.

“His chances of succeeding are slim and elections are likely in September,” Kit Juckes, a strategist at Societe Generale, wrote on Tuesday. “Which leaves us 3-4 months of uncertainty ahead of a vote that may be seen as a referendum on Euro-membership.”

The worries sent Italian yields sharply higher, with the two-year soaring more than 150 basis points at its highs. Elsewhere along the curve, the benchmark 10-year yield is up more than 40 basis points at 3.08%, and according to the Citi Fx Technicals team led by Tom Fitzpatrick, things are most likely just getting started.

In a note sent out to clients on Friday, Fitzpatrick’s team suggested that a weekly close above the 2.72%-to-2.74% level would “complete a clear double bottom with a target as high as 4.40-4.45%.” And while it’s only Tuesday, yields look as if they are well on their way to close above that key level.

5 29 18 italian 10 year COTD

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Citi FX Technicals

That’s most likely bad news for the rest of the European periphery, which is seeing borrowing costs surge alongside Italy’s. Greece is seeing the biggest impact, with its 10-year yield up 47 basis points at 4.81%. Spain’s and Portugal’s 10-year yields are higher by 7 and 12 basis points.