Italian bonds slump on banking crises

The Italian government bonds slumped on Tuesday as investors worried that the country could be heading towards a new banking crisis. The yield on the benchmark 10-year bond rose nearly 3 basis points to 1.26 percent and the yield on short-term 2-year note also jumped nearly 3 basis points to -0.075 percent by 11:20 GMT.

The risk is more concentrated more heavily in the Italian banking sector. In Italy, 17 percent of banks’ loans are sour. That is nearly 10 times the level in the US, where, even at the worst of the 2008-09 financial crisis, it was only 5 percent. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

Italy's third-largest lender, Banca Monte dei Paschi di Siena SpA, bad loans were so thick it assigned a team of 700 to deal with them and created a new unit to house them. The ECB asked the bank to slash its bad debts by 40 percent over three years. Italy's banks are saddled with 360 billion euros of bad loans, a third of the euro zone total.

The Banca Monte dei Paschi di Siena SpA shares were slammed to an all-time low, highlighting the suffering among Italian bank stocks this year as the sector grapples with bad loans on its books and ultralow interest rates.

Moreover, Italian economy is also facing the possible of political uncertainty. The Prime Minister Matteo Renzi has started a campaign to win an October referendum on constitutional reform, aimed at ending Italy's history of unstable governments. Renzi has said he will stand down if he loses a gamble that could revive turbulence in the euro zone's third-largest economy.

Meanwhile, the FTSE-MIB trading down 0.56 percent at 15,921.86 by 12:00 GMT.