Having perplexed traders for months with their honey badger-like gains even as Italy exhibited its traditional political chaos, decisionmaking gridlock and a delightful inability to form a coalition government pushing the country to the verge of new elections, overnight Italian bonds were finally rattled, as the risk of a fresh Italian vote as soon as July and political uncertainty were finally appreciated by traders, sending the yield on 10Y BTPs 10bps higher to 1.87%, set for biggest selloff since December, and rising to the the highest level since March 28.

Traders are also keenly watching the 10Y Italy-Germany spread, which recently hit the narrowest level in two years. Meanwhile, as Bloomberg notes, there's room for Italy to further underperform its periphery peers too, especially with largely positive catalysts still in place for Portugal and Spain. Will today's rout impact demand in the primary market? Watch Friday's sale of 3- and 7-year bonds for signs of a potential buyer's strike.

As Bloomberg adds, the weakness in BTPs has also spilled over to other peripherals: Spanish, Portuguese 10y are both 3-4bps wider, though move is met with dip-buying demand, a London trader told Bloomberg; the long-end Austria under pressure as concession builds into supply, helping core curves edge steeper.

The contagion also hit Italian stocks, with Italy’s FTSE MIB benchmark sliding as much as 2.4% after leaders of the Five Star Movement and the League rejected the idea of a non-partisan prime minister and called for elections.  The drop accelerated after Finance Minister Pier Carlo Padoan told lawmakers that a lingering period of political uncertainty in Italy could become a brake for a widespread recovery in investments; this sent the FTSE MIB to session lows, and was down 2.1% as of 7:20am ET...

... the worst performer among major European markets on Tuesday, which have pushed the Euro Stoxx 600 down 0.3%.