Italy was plunged into a political crisis last week when Draghi tendered his resignation after senators from the populist 5-Star Movement refused to back the government in a vote of confidence. The move pushed bond yields higher and weighed on the euro.
Draghi, whose resignation was rejected by the Italian president, demanded the unity of his coalition partners as the price to pay for remaining in office. But his call appeared to widen the cracks within the government.
After falling earlier during Draghi’s speech to the upper house of parliament, Italian yields then rose. The 10-year yield rose 4 basis points (bps) to 3.467% while the two-year yield rose 7 basis points to 1.427%.
The spread between Italian and German 10-year yields, a key measure of investor nervousness about Italy, was trading around 218 basis points on Wednesday.
The result of the vote on the Prime Minister’s speech is expected around 1730 GMT.
“In the event that Mr. Draghi confirms his resignation today, there is a chance that President Mattarella will open a round of consultations with all political parties to check whether there is a majority in parliament to support a new government. with a different prime minister, with the primary objective of pushing through the 2023 budget law before calling an election,” UniCredit analysts said in a research note.
“It will not be an easy outcome, which will further increase political uncertainty.”
Investors are also gearing up for Thursday’s European Central Bank meeting, where policymakers are expected to raise rates and outline a tool to contain market stress for debt-ridden eurozone members like Italy.
Elsewhere, risk appetite was also buoyed by news that deliveries of Russian gas to Europe will resume on Thursday after a shutdown for maintenance.
“General market sentiment has improved following news of the Nord Stream resumption as the risks of a prolonged shutdown have receded,” said Peter McCallum, rates strategist at Mizuho Bank London.
Yields on Germany’s benchmark 10-year government debt fell to 1.248%, below a one-week high of 1.31% hit on Tuesday.
Russian gas flows through the Nord Stream 1 pipeline are expected to restart on Thursday after the end of scheduled maintenance, two sources familiar with the export plans told Reuters.
If Russian gas supplies, which are currently the main determinant of Europe’s economic outlook, were to be interrupted, economic activity could fall by more than 6% in some countries, the International Monetary Fund has warned.