Euro zone government bond yields rose in thin trade on Monday as investors focused on central banks' tapering while trying to assess the potential impact on markets should former ECB boss Mario Draghi leave his job as Italian prime minister in January.

Parliament will convene to choose a new Italian president in January, and the former European Central Bank chief is the most favoured candidate. Draghi has signalled he would be willing to become head of state.

Germany's 10-year government bid yield, the benchmark of the bloc, rose 2 basis points to -0.228%, its highest level since November 25.

"Bond markets have been settled recently after reacting to Omicron fears," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

"I think borrowing costs will be more inclined to rise as governments can handle the pandemic, while central banks will probably need to raise rates to tame inflation," he added.

Analysts warned about a potential increase in Italian risk premium as Draghi's arrival in February 2021 has boosted confidence in the country's debt-ridden economy. They see snap elections as the worst-case scenario.

But Germany's expected less stringent fiscal policy approach might support peripheral bond prices in 2022 ahead of reform of the European Union's stability pact.

Italy's 10-year government bond yield rose 4 basis points to 1.165%, its highest level since November 1.

"From a market perspective, there cannot be a better prime minister than Mario Draghi in Italy. His credibility is unmet by any other potential candidate who might take over," Valentijn van Nieuwenhuijzen, CIO di NN Investment Partners, said.

"Germany's new political stance combined with the EU recovery plan provides a more supportive backdrop for peripheral bonds, which is the main reason why we don't anticipate big shocks in the government bond market," he added.

On the other hand, a clash over EU budget rules will probably hurt peripheral bond prices, triggering a rise in their yields, as it could mean more stringent fiscal management for the most indebted countries.

Last week, France and Italy called for the European Union's fiscal rules to allow more leeway for investments that would help the 27-nation bloc become greener and more self-sufficient in a post-pandemic world.

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