(Bloomberg) -- Italian bonds rallied, sending the 10-year yield below 3% for the first time since May, as investors bet that a new government will stick to commitments needed to unlock about 200 billion euros ($205 billion) of European Union funds.

Yields on the nation’s 10-year bond fell as much as 6 basis points to 2.96%, tightening the spread over equivalent German securities to 214 basis points. That more than erases the move wider following Mario Draghi’s resignation as prime minister, a move that raised the prospect of prolonged political uncertainty ahead of snap elections in September.

“It reflects hopes that the election campaign and the new government will not challenge Draghi’s fiscal and reform record,” said Antoine Bouvet, senior rates strategist at ING Groep NV, adding “it is of course early days and I would personally be cautious before reaching any conclusion on that front.”

Bloomberg News reported on Friday that far-right leader Giorgia Meloni, who is leading in opinion polls ahead of snap elections in September, plans to stick to EU budget rules if she wins. That’s helped reverse a selloff compounded by the European Central Bank’s first tightening cycle in a decade, a major headwind for indebted economies such as Italy’s.

Highlighting the challenges facing Italy, an indicator for economic activity by S&P Global fell for a fifth consecutive month in July to the lowest since June 2020.

The rally promises to take pressure off the ECB, which has has pledged to step in if Italy’s borrowing costs start rising too much relative to Germany’s. The spread widened to almost 250 basis points after Draghi’s government collapsed, a level that some investors say could prompt policy makers into action.

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Author: James Hirai