Yields, which move inversely to prices, had moved to 2.024 per cent in the early afternoon, a climb of more than 12 basis points. This marks a doubling of yields since they hit record lows of just over one per cent in March this year.
Read more: Live: Italian referendum fallout
Although markets had mostly priced in the result of the referendum after the last polls showed a convincing defeat for Prime Minister Renzi, the rise in bond yields might reflect the scale of the defeat, which could also threaten the recovery of Italian banks.
Italy’s banking sector drove the FTSE MIB index down by over 1.3 per cent, with Banco Popolare di Milano and Banco Popolare both falling by more than seven per cent in the day.
UniCredit fell by more than six per cent and Mediobanca fell by almost five per cent. Banca Monte dei Paschi di Siena continued its share price fall with investors further discounting its shares to €18.55. Shares in the world’s oldest bank started the year well above €115.
“Some state assistance is inevitable” for the banks, said Raj Badiani, senior Italian economist at IHS Global Insight.
“With the Italian recovery failing to gain any momentum, the pressure on the banking sector is not going way, and with ultra-low interest rates expected to prevail, the need to find broader and deeper remedies to their poor profitability and bad loan problem is pressing,” he added.