[ LONDON] Italy is set to lead a surge in euro zone government bond supply on Tuesday in what would be the first major test of investor sentiment after concerns over the future of Prime Minister Matteo Renzi intensified.
The yield on Italy's 10-year BTP bond rose 1.5 basis points to 1.13 per cent ahead of a planned sale of up to 7.75 billion euros (S$11.8 billion) of three bonds on Tuesday.
Tuesday's move caps a steady rise in the yield over the last fortnight. "BTP yields have sold off over the last two weeks, taking the 10-year BTP-Bund spread (versus Germany) 8 bps wider," said Michael Spies, an analyst at Citi. "Rising uncertainties in Italy regarding its own referendum are likely to weigh on the market tone."
The referendum is on a set of parliamentary reforms that would effectively abolish the Italian Senate as an elected chamber and sharply reduce its ability to veto legislation.
Renzi promised to resign as prime minister if he failed to convince voters to support the constitutional change, and he appeared to reiterate that intention last week.
Ratings agency DBRS earlier this month said it was placing Italy under review with negative implications partly because of political uncertainty.
Other euro zone bond yields were also up on the day ahead of the release of key data in Europe and particularly in the US.
Germany's 10-year bond yields were up 1 bps to minus 0.07 per cent ahead of the release of a preliminary inflation report, with France and Italy to follow suit on Wednesday.
Trading is also likely to be jittery ahead of the release of U.S. non-farm payroll data due on Friday.
The numbers have gained significance after US Federal Reserve chair Janet Yellen's hawkish comments last week, when she stated that a case for a rate increase had increased in recent times.
"Should we get a strong jobs report for August then the next (Fed) decision in three weeks will absolutely be a live meeting, whether markets want to accept that or not," said Craig Erlam, a senior market analyst at OANDA.
The US employment report on Friday is expected to show an increase of 180,000 jobs in August, according to the median estimate of 89 economists polled by Reuters, below the better-than-expected 255,000 additions in July and 292,000 gains in June.