By Abhinav Ramnarayan
LONDON, May 28 (Reuters) - Italy's bond yields rose sharply for a second day on Tuesday as its deputy prime minister hit back over what he said were European Union plans to slap a fine on the country for spending too much.
Matteo Salvini said the EU could impose a 3 billion euro fine on Italy due to its rising debt and structural deficit and added he would use "all his energies" to combat that threat.
His political position at home was strengthened in the EU parliamentary election, in which his League party won 34.3% of the vote.
Italian government bond yields rose 7-10 basis points across the board, with the 10-year yield hitting a one-week high of 2.726%, having already risen around 11 bps on Monday. IT10YT=RR and marking the sharpest two-day rise in benchmark borrowing costs since the start of the year.
"There is a fear that this conflict (between Rome and Brussels) could heat up again. Certainly everyone expected it to heat up in the autumn, but nerves are rising already," said DZ Bank strategist Daniel Lenz, referring to potential tensions when Italy formulates its 2020 budget.
"Comments by the Italian government saying over and over again they want to renegotiate EU fiscal rules is really putting BTPs under pressure."
The tensions are affecting risk sentiment through the market, with the single currency dipping slightly to $1.1181 while German 10-year Bund yields dropped to a 2-1/2 year low of -0.155%. DE10YT=RR
Other high-grade euro zone bond yields were also lower across the board in a risk-off environment, with the ouster of Austrian Chancellor Sebastian Kurz adding to the nerves. AT10YT=RR, FR10YT=RR
Greek benchmark government bond yields dipped as much as four basis points to 3.12 percent, with the prospect of a national cheering a market hoping for a more rightist government. GR10YT=RR
"This strong spread-tightening is because of this news about snap elections by the end of June by the earliest, but early summer in any case," said Lenz. "That would most likely put an end to (left-wing) Syriza and a centre right government would take over."
(Reporting by Abhinav Ramnarayan; editing by John Stonestreet)
((Abhinav.Ramnarayan@thomsonreuters.com; 0044 777 555 1499;))
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