Italian bonds are rallying on news of a........>

EGBS: Italian bonds are rallying on news of a potential early election, with

periphery spreads narrowing to kick off the week, and the US and UK on holiday.

- The Italian President blocked the formation of the M5S/League government as he

vetoed their EconMin nomination, Savona, owing to his anti-EUR stance. This will

likely send Italy to early elections, Corriere reporting potentially on Sep 9.

- 10Y BTP futures opened strongly, the Jun18 future last up 71 ticks to 132.13

and the spread over Bunds down 10.6bps to 195.0bps, well off Friday's high of

217.1bps but still elevated. CTZ/BTPei auctions coming up later (auction cut-off

is at 1000BST, with results around 20 minutes later).

- The 2Y BTP is outperforming amid a bullish steepener in the curve, amid

dissipating fears of a parallel currency. 2Y yields down by more than half from

the 0.690% peak on Friday, last 0.305%.

- Italy outperforming Spain, with BTPs/Bonos spread down 6.3bps to 93.5bps, due

in part to threats of no-confidence in Spanish PM Rajoy and/or early elections.

- Bund futures sold off, Jun18 last off 45 ticks at 160.59.

- Euribor futures a little weaker, Green and Blue contracts off 2.5-3.0 ticks.