Italy’s bonds and stocks slumped as the Five Star Movement and the League reached a coalition agreement to govern the country, outlining proposals that may pressure public finances.
Irish costs of borrowing have so far not been affected.
Benchmark 10-year Italian yields touched the highest level in almost a year, while the local share index slumped to the lowest in a month.
The accord between the nation’s populist leaders aims to ramp up spending on the poor and slash taxes in a direct challenge to the EU.
The parties still haven’t said who they will nominate as prime minister.
The 10-year yield climbed as much as 12 basis points to 2.23%, the highest level since July. The rate has risen 35 basis points this week, set for the biggest increase since June 2015.
The spread over German bunds touched a four-month high of 163 basis points.
However, Ryan McGrath at Cantor Fitzgerald Ireland said investors had so far decided that the effects should not spill over into other European sovereign bond markets.
The Irish 10-year bond traded only slightly higher, at just over 1.01%.
“The coalition implies structurally higher risk premiums given the policy uncertainty. This should ensure ongoing volatility,” said Commerzbank analysts.
Italy’s Ftse MIB index of shares fell 1.3%, with the country’s main banks leading declines.
Before this week, the benchmark had mostly weathered post-vote political concerns as investors focused on corporate earnings and economic data.
The gauge is still up 7.5% this year, the best performance among major western markets.