By John Geddie
LONDON (Reuters) - Italian borrowing costs were set for their biggest two-week rise since the 2012 euro zone debt crisis on Friday, bearing the brunt of a sell-off that has gripped global bond markets.
The country's 10-year bond yield -- an indication of the rate at which it can raise money in markets -- was up 8 basis points on Friday at 2.12 percent
All other euro zone debt yields rose on Friday, as the bout of rising inflation expectations in the United States reverberated across global markets. U.S. 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 at the political repercussions of a referendum next month that 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 (MI:ISP) fixed income strategist Sergio Capaldi said.
Italian Prime Minister Matteo Renzi said on Thursday he would not take part in efforts to form a temporary or technocratic government if he loses the Dec. 4 ballot on constitutional reform.
Opinion polls suggest Renzi will lose and he has said he would then resign.
The political uncertainty this would cause has dented faith in the country's ailing banks, many of which desperately need to clean up a catalogue of bad loans. An index of Italian banking stocks struck its lowest level in five weeks on Thursday.
The catalyst for the general rise in yields on Friday though stemmed from strong U.S. data which further boosted expectations for inflation expectations bolstered by the proposed spending and tax plans of President-elect Donald Trump. [US/]
U.S. 10-year yields hit their highest since December 2015, up 6 bps on the day at 2.34 percent (US10YT=RR), while German equivalents rose 5 bps to 0.33 percent
A sharper rise in Italian bond yields hauled low-rated equivalents with it. Portugal's 10-year yield climbed 7 bps to 3.85 percent (PT10YT=RR), its highest since February, while Spain's climbed a similar amount to hit its highest since June at 1.69 percent