The fall in the lira is leading to a widening in Italian and German bond yields
Adding on to the risk aversion in markets arising from the decline in the Turkish lira, political developments in Italy itself isn't helping. Over the weekend, Giancarlo Giorgetti - a senior government official - said that speculators will probably attack Italian financial markets later this month adding that thinner markets due to summertime trading will help to fuel those assets.
That prompted Italian deputy prime minister Di Maio to refute such an event from taking place, but the damage had already been done.
The spread between 10-year Italian and German bond yields have widened to 273 bps now, the widest since May.
There's a note out by BofAML today as well saying that "the next big move in the Italian bond market is coming".
They noted that the yields spread between Italian and German bonds is set to either tighten to 170 bps or to widen to 400 bps depending on Italy's fiscal deficit situation.
In the event of a tightening, it would come from a moderate widening of Italy's fiscal deficit while the announcement of a market-unfriendly budget would send the spread soaring as markets will have to prepare for ratings downgrades instead.
