Aug 20 (Reuters) - Italian bond yields fell on Tuesday and its bond yield premia over safe-haven benchmark Germany narrowed after Prime Minister Giuseppe Conte said he would resign, potentially paving the way for a new coalition government.
The ruling League party presented a no-confidence motion in the coalition government, with Prime Minister Matteo Salvini demanding early elections, 3-1/2 years ahead of schedule.
He is confident of sweeping into power without the support of coalition partner 5-Star, which he brands as obstructionist.
Five-year yields slipped seven basis points on the day at 0.81% and 10-year yields were down 4.5 bps at 1.30% while the Italian/German 10-year yield spread tightened to 206 bps, from around 215 bps when Conte was speaking
The Italian banking stock sub-index briefly slipped more than 2% during Conte's speech, but recovered sharply after news on his resignation. As of 1410 GMT, the index was down 1%.
After the resignation of Conte who belongs to neither of the coalition groups, the head of state starts formal consultations with various parties to see if a new coalition can be formed
Markets may not cheer the prospect of new elections but they were frequently unnerved by the frequent squabbles within the coalition.
"As far as the process is concerned that means Conte resigns as Prime Minister of this government but that doesn't mean that if there was an agreement between opposition parties he couldn't be reinstated as PM," said Rabobank rates strategist Matt Cairns.
He added that momentum appeared to be behind a formation of a caretaker government rather than general elections. (Reporting by Dhara Ranasinghe; editing by Sujata Rao)