LONDON: Italian government bond yields dropped across the curve on Tuesday as the prime minister was set to try to form a new government, triggering hopes for a return of some political stability in the Southern European nation.

Italian Prime Minister Giuseppe Conte will hand in his resignation to the head of state on Tuesday, Conte's office said, on hopes President Sergio Mattarella will give him a mandate to form a new government.

"If Conte does manage to form a new government within a week with a stable majority, then the potential spread tightening is significant," said ING rates strategist Antoine Bouvet. "But it is still political gamble at this point," he added.

Italian government bond yields dropped 2-4 basis points across the curve, with the benchmark 10-year yield falling 3.5 bps to 0.646%.

The closely-watched Italy-Germany bond yield spread was tighter five basis points on the day at 114.5 bps.

While the resignation may allow an election to be avoided in Italy, the combination of political worries and stock market jitters over US fiscal stimulus bolstered demand for safe havens such as German Bunds.

Asian stocks declined on Tuesday, retreating from record highs as lingering concerns about potential roadblocks to the Biden administration's $1.9 trillion stimulus weighed on sentiment.

Germany's 10-year government bond yield dropped to a two-week low in early trade on Tuesday, though it was back up slightly to -0.54% by 1100 GMT, up a basis points on the day.

Demand for German Bunds also comes as US 10-year Treasury yields dropped to a three-week low of 1.028% earlier in the session as the US Senate pushes to pass its COVID-19 bill.

Later in the session, the European Union is likely to complete the sale of a seven-year benchmark bond issue and a tap of its outstanding 2050 debt via syndication.