The prospect of early elections.........>

EGB SUMMARY: The prospect of early elections and/or a constitutional crisis in

Italy against a backdrop of thin liquidity with UK and US markets on holiday

proved a negative combination for risk assets, with Italian debt hammered. 

- Former IMF-er Cottarelli's appointment as PM by the President needs to survive

a confidence vote; if not, election could come 'after August'.

- The Italian 2-year spread over Bunds blew out 56bps at one stage, and traded

in a wide range of 87.3bps-166.2bps. Last at 155.2bps, highest since 2013.

- Bunds rallied steadily, with 10Y yield down 6bps to a 5-month low at 0.343%.

- A big rally today in long-dated Euribor, with Blue contracts up 6.5-7.0 ticks

to 2018 highs. With the short-end anchored, the strip has flattened to the point

that the steepening over the course of 2018 is nearly unwound.

- Spain is having its own political issues, but these are perceived as of lower

risk compared with Italy. 10Y Bonos moved a further 16bps inside Italy, to a

fresh post-2012 differential of 115.1bps.

- Another thin data calendar Tuesday, but ECB speakers Mersch, Lautenschlaeger

and Nowotny are due to make remarks throughout the day.