UK 10-year gilt yields sink to 2018 lows as growing Italy political fears aide investors into safe-haven assets

The United Kingdom’s 10-year gilt yields found solace in this year’s lows, tracking risk-averse sentiments in the market as political fears in Italy keep on widening, leading to massive demand for safe-haven instruments; rather, a solid shift of debt preferences can be observed away from the Italian benchmark debt markets.

The yield on the benchmark 10-year gilts, plunged 10 basis points to 1.22 percent, the super-long 30-year bond yields slumped 6 basis points to 1.70 percent and the yield on the short-term 2-year traded nearly 2-1/2 basis points lower at 0.67 percent by 10:00GMT.

Events in Italy took a surprise turn over the weekend when President Sergio Mattarella rejected the candidacy of eurosceptic Paolo Savona for the role of Finance Minister in the planned coalition government. The M5S’s and League’s response was to withdraw their bid to form a new government. As a result, the President has asked Carlo Cotarelli to form a technocrat government.

So while a Cotarelli government will probably prevail, its purpose will be limited to be ensuring that the public sector continues to function until a new election, which is likely to take place this autumn, is held. And with the latest opinion polls suggesting that the League is gaining electorate support, while M5S’s ratings remain broadly stable, a new election is unlikely to deliver a materially different result, Daiwa Capital Markets reported.

Lastly, the holiday-shortened week in the UK should be relatively quiet. The main release will come on Friday with the manufacturing PMI survey, which will provide insight into whether the recent softness in domestic demand will have continued to hold back manufacturing activity.

Meanwhile, the FTSE 100 traded 1.27 percent lower at 7,631.84 by 10:10GMT, while at 10:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at -0.72 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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