Italy's benchmark borrowing costs spiked to a two-year high and stocks fell to a five-week low Monday on concerns about faster eurozone inflation and snap elections in Europe's third-largest economy.
Italy's Treasury raised around €9 billion in a three-part bond issue that included a new benchmark 10-year issue that was priced to yield 2.37%, the highest since October 2014. The sale pulled yields on the so-called 'on the run' 10-year to 2.32% a 50 basis point increase since the start of the year.
Bond investors are starting to factor in faster inflation dynamics in the Eurozone after data Monday showed consumer prices in certain German states point to the quickest overall reading for inflation in the region's biggest economy in four years. Germany's official statistics office will publish its January estimate at 13:00 GMT.
Concern for the health of Italy's banking sector was also evident in Monday's moves, with the benchmark FTSE-MIB index falling 3.25% to a five-week low of 18,933 points after the country's biggest lender, UniCredit SpA (UNCFF) , booked a €12.2 billion bad-loan writedown and said its key capital ratio would likely fall short of a target set by the European Central Bank earlier this year.
Investors put further downward pressure on bank stocks after the ECB's banking supervisor, Daniele Nouy, told Italy's Repubblica newspaper that lenders weren't doing enough to rid their balance sheets of the estimated €360 billion they hold in non-performing loans.
The FTSE Italy Banks index was marked 3.37% lower at 9,360.7 by 11:30 GMT, the lowest since Dec. 14.
The market moves also come amid speculation that former Prime Minister Matteo Renzi could be readying a political comeback after his humiliating referendum defeat last December. Italy's Constitutional Court ruled last week on a package of Senate reforms that will allow for a snap election this year, with some analysts suggesting polls as early as June.
However, Italy's complicated electoral process means Renzi would likely need to form an alliance with disgraced former Prime Minister Silvio Berlusconi's Forza Italia party, in order to form a government. However, the 80-year old billionaire, who had open-heart surgery last year, has been ordered to stand trial over allegations he influenced witnesses in his 2014 acquittal of statutory rape charges.
The scandals could open the door to the populist -- and anti-European -- Five-Star party, led by former comedian Beppe Grillo, but weekend polls conducted by a number of Italian newspapers suggest no clear leader has yet emerged if elections are indeed held later this year.