* Moody's to review Italy's ratings
* Italian yields end week with rise of almost 20 bps
* Worries about political risk weigh on Italian bonds
(Updates prices for close)
By Dhara Ranasinghe
LONDON, Oct 7 Italy's bond yields notched up
their biggest weekly rise since December 2015 on Friday,
reflecting growing jitters over a looming referendum and ahead
of a Moody's review of the country's sovereign rating later in
Euro zone bond yields were broadly higher with sentiment
fragile in a week that has seen sharp selling on talk of an
eventual scaling back of massive ECB asset purchases, worries
about a "hard Brexit" and strengthening U.S. data that could
support the case for a December Federal Reserve rate hike.
Against this backdrop, 10-year bond yields in Portugal and
Italy rose to their highest levels since June, while a sharp
rise in British gilts dragged their German counterparts higher.
For now, focus was on Italy, with Moody's ratings agency
scheduled to release its review of the country's Baa2 rating
later on Friday.
Commerzbank said the stable outlook on the rating could be
at risk of a downgrade given rising political risks, high debt
levels and a weak banking sector.
"Moody's have not reviewed Italy since 2014 so it's time for
an update on its views," said Commerzbank's interest rate
strategist David Schnautz. "We have a very important referendum
coming up, debt-to-GDP levels have not yet topped out and the
banking sector is still weak."
Italy has taken steps to tackle bad loans but these efforts
may not be sufficient to strengthen its ailing banking system,
the International Monetary Fund said on Wednesday.
Italian bonds have underperformed euro zone peers in the
months before a Dec. 4 referendum on constitutional reform on
which Prime Minister Matteo Renzi had earlier staked his career.
Ten-year bond yields hit 1.43 percent on
Friday, their highest since late June, cementing a weekly rise
of almost 20 bps, the biggest move since December last year.
Italy successfully sold its first 50-year bond earlier this
week and some analysts say the recent underperformance has gone
BlackRock fund manager Jozef Prokes said on Thursday he had
taken out his short position on Italian government bonds and was
now more neutral on the market.
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Like other peripheral countries, Italian bonds have been
especially hard hit by a report this week that the European
Central Bank might scale back its quantitative easing scheme.
While comments from ECB officials have helped soothe those
concerns, markets remain on edge. In addition, a sharp sell-off
in Britain's bond market and a rise in U.S. Treasury yields has
tempered sentiment towards euro zone bonds.
Fears of a "hard Brexit" by Britain from the European Union
-- meaning it will give up trying to remain in the EU's single
market in order to impose controls on immigration from the other
27 EU member states -- have also surfaced this week, sending the
British currency diving.
"There is a concern that the ugly weakness in sterling is
going to cause the wrong type of inflation," said Mizuho
strategist Peter Chatwell.
Across the euro zone, bond yields were 1-2 basis points
higher, with German Bund yields rising to 0.03 percent
- their highest level in more than two weeks.
As 10-year gilt yields rose over 10 bps, the gap
over German Bund yields stood at around 95 bps -- its widest
level since early July.
(Reporting by Dhara Ranasinghe; Editing by Catherine Evans and