LONDON: Italy's borrowing costs were set to climb for the fourth straight week on Friday, as the country bears the brunt of a sell-off that has gripped global bond markets.
At one point the 10-year Italian government bond yield -- an indication of the rate at which it can raise money in markets -- was set for its biggest two-week rise since the 2012 euro zone debt crisis.
As the session wore on some buying interest saw the yield settle back down to 2.03 percent, flat on the day, although it was only a couple of basis points away from notching up its worst period in years.
Having hit a trough of 1.05 percent in mid-August, Italy's government borrowing costs are now almost double that, in the wake of Donald Trump's unexpected victory in the US presidential election and on caution ahead of an Italian referendum that could put Prime Minister Matteo Renzi out of a job.
"Italian yields seem to reach a ceiling at the 2.1 percent, mark, but the upcoming referendum has people worried not just about Italy but what it means for the whole of the euro zone," said ING rates strategist Benjamin Schroeder.
Most other euro zone debt yields rose on Friday, as the bout of rising inflation expectations in the United States reverberated across global markets. US borrowing costs are set for their biggest two-week rise in 15-years, while their premium over German equivalents is at its highest since at least 1990.
But in the euro zone, Italy has been at the sharp end of the rout as investors start to worry about the political repercussions of the Dec. 4 referendum, which could further destabilise a country battling a banking crisis and weak growth.
"The market is viewing this referendum as a watershed between heaven and hell," Intesa Sanpaolo fixed income strategist Sergio Capaldi said.
Prime Minister Renzi said on Thursday he would not take part in efforts to form a temporary or technocratic government if he loses the ballot on constitutional reform.
Opinion polls suggest Renzi will lose and he has said he would then resign. The uncertainty this would cause has dented faith in Italy's ailing banks, many of which desperately need to clean up a catalogue of bad loans.
An index of Italian banking stocks hit its lowest level in five weeks on Thursday. The catalyst for the general rise in yields on Friday though stemmed from strong US data which further boosted expectations for inflation expectations bolstered by the proposed spending and tax plans of President-elect Donald Trump.
US 10-year yields hit their highest since December 2015 at 2.34 percent before retreating to 2.30 percent.
Portugal's 10-year yield was up 5 bps to 3.82 percent at 1200 GMT, close to its highest since February, while Spain was up 3.3 bps to 1.63 percent around the same time .
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