August 22, 2017 / 10:33 AM / 3 years ago

UPDATE 2-Parallel currency proposal rocks Italian government bonds

* Former PM Berlusconi said to support idea

* Italy yield jumps 9 bps to three-week high

* Italian/German yield gap pushes out to 170 bps

* Euro zone periphery govt bond yields (Updates prices, adds graphic)

By Dhara Ranasinghe

LONDON, Aug 22 (Reuters) - Italian government bond yields jumped on Tuesday, stretching the gap with German peers to a five-week high, in the wake of proposals to introduce a parallel currency in Italy that have upped the ante for elections due next year.

Italy’s 10-year bond yield, which moves inversely to the price, climbed as much as 9 basis points to a three-week high at 2.13 percent. It closed up 7 bps, its biggest daily rise in a month.

As well as concern about the ECB’s monetary policy and geopolitics, analysts said the sell-off was caused by reports at the weekend that former prime minister Silvio Berlusconi, who leads the centre-right Forza Italia party, has indicated his support for the introduction of a parallel currency.

The report highlights concerns about broader anti-euro sentiment in Italy, the bloc’s third biggest economy, as it heads into elections due by May next year.

“People are referring to this story where Berlusconi outlines his idea of a parallel currency,” said Benjamin Schroeder, senior rates strategist at ING.

“This is not a new idea but what you see is that as people start positioning for Italian elections, stories like these get more and more attention.”

Earlier this year, comments by France’s far-right leader Marine Le Pen about leaving the euro rattled markets heading into French presidential elections in April and May.

While those jitters faded with the election of Emmanuel Macron as French president, political uncertainty in Italy could unsettle financial markets once more.

The idea of a parallel currency it Italy is also significant because it could be a way for Berlusconi to find some common ground with other political parties such as the anti-immigrant Northern League and right-wing Brothers of Italy, said Lorenzo Codogno, a visiting professor at the London School of Economics and chief economist at LC Macro Advisors.

“In fact, over the next few days the three parties are due to sit together and decide a common programme,” he said. “Politically, it would also be an important step towards preparing the centre-right for the next general election.”

As Italian bonds underperformed their peers, the Italian/German 10-year yield gap reached 170 bps — its widest in five weeks. That is up from a 2017 low of around 152 bps hit earlier this month.

Italian stocks also underperformed other European bourses .

Most other euro zone bond yields were flat or a touch higher on the day with investors largely side lined ahead of a gathering of top central bankers in Jackson Hole, Wyoming later this week.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Dhara Ranasinghe, additional reporting by John Geddie in LONDON and Danilo Masoni in MILAN; Editing by Richard Balmforth

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