LONDON: The yield premium investors demand for holding Italian government bonds over top-rated Germany rose to its highest since late May on Monday as political uncertainty in Italy and a rout in emerging markets hit Italian debt.
Broader euro zone bond markets were largely stable at the start of the week, with Germany's benchmark 10-year Bund yield pinned at a one-month low.
Italy once again stood out as the bloc's underperformer, weighed down by conflicting comments from the government.
Speculators will probably attack Italian financial markets this month but the country has the resources to defend itself, Giancarlo Giorgetti - a senior and highly influential government official - said in a newspaper interview on Sunday.
However, Italy's Deputy Prime Minister Luigi Di Maio said on Monday the country did not risk a financial market attack and that his government could not be "threatened" by the idea.
Mixed messages from various government ministers and coalition officials have confused investors and exacerbated market concerns over the coalition's economic plans.
Italian bonds and stocks were also hit by turmoil in Turkey, which has cut into demand for risky assets. Markets were unnerved on Friday by a report in the Financial Times that the European Central Bank was worried about European banks' exposure to Turkey.
Consequently, investors continued to push Italy's borrowing costs higher, with yields across the curve 3 to 11 basis points higher .
The gap between 10-year Italian and German government bond yield widened to 275 bps , up from 268 bps late on Friday and the widest since late May - when a political crisis sparked a sell-off in Italian bonds.
"All peripheral bond spreads are wider, so that reflects a broader risk-off sentiment in markets," said ING senior rates strategist Martin van Vliet. "The comments by Di Maio in particular echo the economic warfare rhetoric we've seen from Turkey, so that probably doesn't help."
On Monday, South Africa's rand plunged to a two-year low against the dollar .
The strain in emerging markets continued to support demand for safe-haven bonds, with Germany's 10-year Bund yield dipping to a one-month low at 0.31 percent.
Elsewhere, Greek bond yields fell after an unexpected Fitch Ratings upgrade on Friday.
Fitch upgraded Greece's rating to 'BB-' from 'B', citing improvements in the country's banks and its relationship with its European creditors.
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