Italy sold the 183-day bills at a yield of 1.237 percent, the highest since October. Investors bid for 1.44 times the amount of securities allotted, down from 1.65 times on Jan. 29. The Rome-based Treasury plans to sell as much as 6.5 billion euros of five- and 10-year bonds tomorrow.

“Italy's election results suggested a hung parliament, the most unfriendly outcome for financial markets,” Giuseppe Maraffino, a strategist at Barclays Plc in London, wrote in a note to clients. “Pressure on Italian yields is likely to increase in the next few days, also fueled by supply pressure ahead of the auctions.”

Volatility on Italian bonds was the highest in euro-area markets, followed by those of Spain and Germany, according to measures of 10-year debt, the yield spread between two-year and 10-year securities and credit-default swaps. Spanish 10-year yields jumped 11 basis points to 5.28 percent after rising to 5.59 percent, the highest since Dec. 10. Portugal's 10-year yield climbed 26 basis points to 6.43 percent, while its two-year rate surged 30 basis points to 3.55 percent after reaching 4.29 percent, the most since Dec. 3.

Eoin Treacy's view Italy's political impasse highlights the weak link in the approach taken by the Eurozone's political elite to managing the region's debt problems. Negotiations between creditor and debtor nations have resulted in a grand bargain where austerity was accepted in return for continued access to credit. While these agreements required torturous negotiations between governments, the challenge of selling them to restive populations remains an even greater, and as yet incomplete, task.

The pay cuts, jobs losses, bank bailouts, pension reductions, benefit cuts, elimination of services, loss of perks and higher taxes required to restore competitiveness within the Eurozone are based on the assumption that citizens will accept them. The fact that Mario Monti was foisted on the Italian public in 2011 without an election has probably contributed to the loss of faith in the political establishment that has resulted in such a large protest vote. This is yet another symptom of the incomplete nature of the Eurozone solution.

Despite the political impasse currently facing Italy, the rise in government bond yields represents hard reality. Italy must do what is required to control borrowing costs if it is to avoid the threat of default. While the short-term outlook is still uncertain and prone to volatility, the medium-term outlook suggests that the status quo will remain and that the reforms already instituted with not come under pressure.

Italy's 10-year spread over Bunds hit a medium-term low in late January near 250 basis points and rallied this week to break the progression of lower rally highs. A sustained move below 300 basis points will now be required to suggest a return of investor confidence.

Italy has unsurprisingly experienced the most selling pressure but Spain's political situation is also prone to uncertainty. Spanish spreads hit a medium-term low in mid-January and rallied this week to break the progression of lower rally highs. A sustained move below 350 basis points will be required to check supply dominance. Portuguese spreads have a similar pattern, while Irish bonds appear to be unwinding the short-term overbought condition. Greek spreads have so far been relatively unaffected.

Against this background the potential for additional easing by the ECB has increased. The Euro Stoxx Banks Index has fallen to test the upper side of the underlying trading range and the region of the 200-day MA. A clear upward dynamic would be required to confirm support in this area.