Disparities in the Italian government's 2019 budget plans pushed up Italy's bond yields on Thursday, marking an underperformance with euro zone peers.
Most 10-year bond yields in the euro zone were lower in early trade, with Germany's 10-year benchmark bond yield reaching two-week lows against a backdrop of risk aversion.
But in regional bond markets, the spotlight remained on Italy.
Contrasting comments by government officials are leading to swings in Italian yields as investors try to assess whether the country's 2019 budget will clash with European Union rules on fiscal discipline.
Italy's anti-establishment coalition government, which took office in June, has ambitious spending plans that have raised concerns on financial markets.
Italian Prime Minister Giuseppe Conte soothed investor concerns on Wednesday, saying that Italy would defend its interest but not be "foolish" in its demands.
His remarks pushed Italian bond yields down. But the move was reversed after Deputy Prime Minister Luigi Di Maio told Bloomberg News that he was ready to repeat in the budget talks the tough tactics used to win concessions from the EU on migration.
"The to and fro of the Italian budget continues to see swings and roundabouts in markets as we edge closer to finding out if the government will be spending money in an id-like fashion or not in search of the pleasure principle," analysts at Rabobank said in a note.
Italian bond yields rose around 4 basis points across the curve on Thursday. The 10-year benchmark bond reached 2.9 percent, up from the week's lows of 2.82 percent recorded on Wednesday.
That left the Italian/German 10-year bond yield gap at around 252 basis points, about 10 bps wider than levels touched on Wednesday.
Two- and five-year Italian bond yields were trading around 1.01 percent and 2.1 percent respectively .
Global risk aversion helped fuel demand for safe-haven bonds in the euro area. The Turkish lira and Russian rouble came under pressure amid concerns of escalating tensions with the U.S. while stock markets in Europe opened broadly lower
Threats to global growth are growing as the risk of protectionism and higher U.S. tariffs sap confidence, the European Central Bank said in a regular economic bulletin on Thursday.
Also in focus for euro zone bond investors is the auction of 30-year U.S. Treasury bonds, following the successful sale of $26 billion 10-year debt on Wednesday.