* Peripheral countries amongst losers in euro zone for 2016
* Weak banks, low growth, politics hit Italy, Portugal
* Investors offload long-dated bonds as QE changes loom
(Updates price action, adds quote)
By Abhinav Ramnarayan and Dhara Ranasinghe
LONDON, Dec 30 Italian and Portuguese government
bond yields were on track on Friday to end 2016 with their first
yearly rise since the 2011 euro zone debt crisis.
The rise in borrowing costs in the two peripheral countries,
regarded as among the weakest links in the single currency bloc,
comes against a backdrop of concern about weakness in their
banking sector and economy as well as political instability.
"What we've seen is that most clients and investors have
been worried about the banking situation. There were noises at
the start of the year about the Italian NPLs (non-performing
loans) situation, and it is still very much in the spotlight,"
said BBVA strategist Jaime Costero Denche.
He said the threat of ratings downgrades from DBRS for both
countries adds to the concerns, as does the political situation
in Italy in particular.
Matteo Renzi stepped down as prime minister this month after
voters rejected constitutional changes in a referendum. The
possible rise of anti-establishment party 5-Star Movement is
also a concern for the future, Costero Denche said.
Italy's 10-year government bond yield has
risen about 23 basis points this year to around 1.83 percent.
Portuguese 10-year bond yields have soared about 127 bps this
year to 3.80 percent. That marks the first annual
rise in borrowing costs in both countries since 2011, according
to Tradeweb data.
Portugal's bond market has been a consistent underpeformer
this year with negative returns for investors.
In Italy, efforts to resolve the banking crisis and the
swift formation of a new government after Renzi's resignation
have helped Italian bonds recover some ground recently.
Ten-year Italian yields were set to end December with a fall
of around 15 bps, the biggest monthly fall since March.
"The Italian banking crisis tells us that national
governments are willing to fill all the holes which the system
has at any cost," said Naeem Aslam, chief market analyst at
ECB QE CHANGES LOOM
Long-dated euro zone government bonds sold off on Friday,
the last day before changes to the European Central Bank's
bond-buying scheme kick in and the final trading day of 2016.
The ECB announced changes earlier this month to the
parameters of the quantitative easing programme, or PSPP, that
suggested the focus of purchases would shift to the short end.
The changes include removing the deposit rate floor for
purchases and making the minimum maturity for eligible bonds one
year instead of two. Euro zone bond curves are expected to
steepen as a result, and the market moved on those expectations
"It will take a few weeks to see how the ECB and the
national central banks adjust their purchases, but the way
inflation prospects evolve as well as the PSPP will be a
driver," said DZ Bank strategist Christian Lenk.
German 30-year bond yields rose 7 basis points
to 0.94 percent. Benchmark 10-year Bund yields were 3 bps higher
at 0.20 percent.
Most other euro zone bond yields were 3 to 8 bps higher on
the day, facing upward pressure from looming supply.
France said on Friday it would sell 8.5 billion to 9.5
billion euros ($9 billion to $10 billion) of long-term
government bonds next week. Spain said it would also sell bonds
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Editing by Larry King)