Italian bonds slumped, driving two-, five-, 10- and 30-year yields to euro-era records, after LCH Clearnet SA raised the deposit it demands for trading the nation's securities.

Two-year note yields rose above 10-year rates, with five-year debt climbing above 7.5 percent as Prime Minister Silvio Berlusconi's offer to resign left his weakened government struggling to implement austerity measures to reduce borrowing costs. German 10-year bunds outperformed all their regional peers as the drop in Italian bonds boosted demand for the safest fixed-income assets. The euro sank and U.S. Treasuries jumped.

The LCH change for Italy "is a big deal in that it highlights the deterioration of its credit quality," said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. "The more pressing issue still remains the political backdrop. The market would love a technocrat government to get the reforms through. If we go down the election route we've probably got three months of inaction."

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