UPDATE 1-Italian bond yields hit seven-week highs as rating jitters grow

Italy's 10-year government bond yield rose to its highest in seven weeks on Tuesday, pushed up by unease over government infighting and an upcoming rating review. Analysts stressed that trading in bond markets remained thin following the Easter holiday, exaggerating price moves. A rise in oil prices to 2019 highs also put pressure on eurozone yields generally.

Italy's 10-year bond yield jumped 7.5 basis points to 2.67 percent -- its highest since early March. The Italian/German yield gap grew to its widest in two weeks at around 261 bps. Rating agency S&P Global is due to review Italy's credit rating this Friday. It rates Italy BBB, two notches above junk, but has a negative outlook on the country.

Italy's weak economy and concern about a growing budget deficit have raised worries about Italy's rating outlook. "I'm not expecting a change in the ratings, but there is some nervousness in the markets," said Pooja Kumra, European rates strategist at TD Securities in London. "Also, there has been heightened disputes within the government and general weakness in the EGB (European government bond)space, which is not helping."

Italy's coalition partners clashed on Friday over mutual allegations of corruption, with relations between the League and 5-Star Movement at their lowest since they formed a government last May. Outside Italy, bond yields across the eurozone rose 2 to 3 bps as rising oil prices lifted inflation expectations. Brent crude prices reached to their highest this year after the United States tightened sanctions on Iran.

The five-year, five-year forward, a measure of long-term inflation expectations tracked by the European Central Bank, rose to a one-month of 1.4176 percent. It had dropped this year as investors reassessed the outlook for a weaker economy and the ECB's scope to lift interest rates. Germany's benchmark 10-year bond yield rose 2.5 bps to 0.049 percent.

It is roughly five bps below last week's four-week highs, and analysts said the outlook for bonds remained favourable after last week's manufacturing activity data suggested the German economy, the euro zone's largest, remained weak. "The 10-year Bund yield will remain near zero percent if we don't see a rebound in sentiment indicators," said DZ Bank rate strategist Sebastian Fellechner, adding that Wednesday's German Ifo sentiment survey may provide the next steer for markets.

In an interview published on Tuesday, ECB policymaker Benoit Coeure said that lenders should focus on their costs rather than blame the ECB's negative rate for their low profits. He also that an upcoming round of multi-year loans to banks should not be as generous as the previous.