* Italian bond yields rise further as politicians cast
on snap elections
* Risk premium rises to highest since November
* 10-year yields set for biggest weekly jump since April
* German yields dip after PMI readings
AMSTERDAM, Jan 22 (Reuters) - Italian bond yields rose again
on Friday as focus turned back to political uncertainty in Rome,
a day after yields jumped when the European Central Bank was
perceived as more hawkish than expected at its policy meeting.
Italy's main ruling parties on Friday flagged snap elections
as the only way out of its political impasse, if Prime Minister
Giuseppe Conte failed to drum up a parliamentary majority after
scraping through a confidence vote this week.
Conte is under pressure as he faces a vote next week on the
country's justice system and could face more pressure to resign
if he loses. He cannot call elections himself, and
the president could appoint a different government if he
The news comes after the ECB's policy decision on Thursday.
Market participants saw the bank as emphasizing it would not
need to use all the firepower of its pandemic emergency bond
purchases (PEPP) if favourable financing conditions can be
maintained without exhausting the envelope.
Government bonds from Italy and Spain -- who rely on ECB
purchases to keep a lid on their borrowing costs as they take on
record levels of debt to fight the pandemic -- sold off heavily,
pushing yields to their highest since early November.
With political uncertainty back on the cards, Italian bond
yields rose further on Friday, with the 10-year benchmark yield
rising as much as 6 basis points to 0.72%
The gap between Italy and Germany's 10-year yields --
effectively the risk premium on Italian debt -- rose to its
highest since mid-November at 122 basis points, above levels
touched during last week's government turmoil in Rome.
"The market was pricing the election chances at zero at the
turn of the year, then when we had deterioration in the
political situation, I guess they probably raised that
probability to something around 5 or 10%," said James Athey,
investment director at Aberdeen Standard Investment.
"To see a headline from the prime minister himself on
reports that he is considering an election is kind of a shock to
the market, so we're seeing Italian yields rising, spreads
Uncertainty around politics, coupled with the market
reaction to the ECB, set Italian 10-year yields on track for
their biggest weekly rise since mid-April, up 13 basis points
"It is a sensible reaction to reduce positions if you
believe the ECB is less dovish and then test where the ECB steps
in," said Sebastien Galy, senior macro strategist at Nordea
Bonds got marginal support from business activity readings,
which showed economic activity in the euro zone shrank slightly
more than expected in January as lockdown restrictions hit the
bloc's dominant service industry.
Germany's 10-year yield, the benchmark for the euro area,
was last down 2 basis points to -0.51%, off eight-day highs
touched on Thursday.
(Reporting by Yoruk Bahceli, additional reporting by Tom Arnold
in London, Stefano Rebaudo and Stefano Bernabei in Milan;
editing by Larry King)