Italy appeared to be heading towards a new government on Wednesday after two parties said they had reached a tentative deal to form a coalition under outgoing prime minister Giuseppe Conte.

President Sergio Mattarella has summoned Mr Conte to a meeting on Thursday morning when he is expected to ask him to try to form a new government made up of the Five Star Movement and the centre-left Democratic party.

This would mean the sidelining of Matteo Salvini and his far-right League party, after he triggered the latest political crisis by pulling out of the 14-month old coalition with Five Star, prompting Mr Conte’s resignation.

Luigi Di Maio, Five Star’s leader, and Nicola Zingaretti, leader of the PD, had earlier told Mr Mattarella they were willing to try to form a government headed by Mr Conte.

“For us politics means service. Eleven million Italians gave us a mandate last year and Five Star will not walk away from its responsibilities,” Mr Di Maio said. He said Mr Conte had demonstrated “great courage” and “a disinterested spirit”.

Earlier Italian bond yields plunged to a record low as hopes rose that a coalition could be agreed, staving off the likely alternative of a fresh election.

The yield on Italy’s 10-year bond — which falls as prices rise — sank to 0.985 per cent, breaking the previous all-time low from 2015. The 30-year yield sank to just above 2 per cent.

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Italy’s bonds have surged since the country’s governing coalition collapsed last week, with investors calculating that any successor is likely to be more market-friendly than the populist alliance of the rightwing League and leftwing Five Star.

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However doubts remain over the stability of a coalition between Five Star and the PD, parties that have often been political enemies. A deal would also have to be accepted by Five Star’s membership.

Mr Zingaretti said that while his party was ready to accept Five Star’s choice of Mr Conte as prime minister, the new government would not “take up the baton” from the previous Five Star-League administration and would start a “fresh challenge”.

Longer-term Italian bonds are among the few in the eurozone that offer yields above zero. The two-year yield, which is highly sensitive to political developments, fell to minus 0.15 per cent.

“If we can kick the prospect of elections into next year, that brings some peace to the market,” said TD Securities strategist Pooja Kumra. “If things are relatively stable, Italy will attract big foreign investors, particularly from Japan, back to its bonds.”

Yields have plunged across the eurozone in recent months as investors anticipate a fresh round of bond buying from the European Central Bank when it outlines its stimulus package next month.

Italy’s borrowing costs have lagged behind the rally amid the latest bout of political instability and fears of a rerun of last year’s confrontation with the EU over the size of Italy’s budget deficit, leaving yields looking relatively attractive to investors.

“This move is the culmination of the positive news on Italian politics but also the grab for yield that’s going on,” said Mohammed Kazmi, a London-based portfolio manager at Union Bancaire Privée. “Italy does stand out for offering investors a positive yield, and more QE (quantitative easing) should provide a backstop to the bonds.”

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Via Financial Times