* Moody's set to review Italy's ratings
* Italian yields set to end week with rise of almost 20 bps
* Worries about political risk weigh on Italian bonds
By Dhara Ranasinghe
LONDON, Oct 7 Italian bond yields were poised on
Friday to notch up their biggest weekly rise since December
2015, reflecting growing jitters over a looming referendum and
ahead of a Moody's review of the country's sovereign rating
later in the day.
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 interest-rate hike.
For now, focus turned to 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, still 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 measures 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 rose 2.5 basis points on Friday to 1.39
percent. It was on track to end the day with a
weekly rise of almost 20 bps, which would mark the biggest
weekly move since December last year.
Italy's successfully sold its first 50-year bond earlier
this week and some analysts say the recent underperformance has
gone too far.
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.
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 exit" 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 in Asian trade.
Attention also turned to a key U.S. non-farm payrolls
report, due later in the day, for the latest update on the
health of the jobs market.
Across the euro zone, bond yields were 2-3 basis points
higher, with German Bund yields rising to 0.021 percent
- their highest level in more than two weeks.
For Reuters new Live Markets blog on European and UK stock
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(Reporting by Dhara Ranasinghe; Editing by Alison Williams)