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Southern Europe's bonds battered by poll showing big Brexit lead

LONDON (Reuters) - Government bond yields in Europe’s southern periphery rose sharply on Monday after a poll showed a significant 10-point lead for those campaigning to take Britain, the world’s fifth largest economy, out of the European Union.

Spanish and Italian 10-year bonds yields were set for their biggest one-day jump in just over two months, while Portugal's 10-year bond yield jumped 10 basis points in its largest daily rise in about five weeks PT10YT=TWEB.

The referendum vote due in 10 days time is expected to have far-reaching consequences for the rest of a continent where support for the economic and political union is wavering in the face of low growth and high unemployment.

While most polls show Britons still closely divided ahead of the June 23 referendum, an ORB poll for The Independent newspaper released late Friday showed the biggest lead for the leave camp since the series started a year ago.

British bookmaker William Hill said on Monday it was offering its shortest ever odds on the chances of Brexit.

Worries over the repercussions of such a vote drove sterling volatility to a record high on Monday as the pound fell to an eight-week low against the U.S. dollar and a three-year trough against the safe haven yen.

“Fixed income investors should look to Brexit-proof their portfolios now,” said Nick Gartside, chief investment officer for fixed income at JP Morgan Asset Management, suggesting lower exposure to peripheral and central European government bonds.

Italian and Spanish 10-year yields rose 7 basis points to 1.38 IT10YT=TWEB and 1.51 percent ES10YT=TWEB, while Greek yields were up some 40 bps at 8.07 percent GR10YT=TWEB.

That pushed the gap Italian and Spanish bonds yields have with top-rated German peers to their widest in about a month.

“While the UK referendum vote remains on a knife edge, we will continue to see pressure on spreads,” said Lyn Graham-Taylor, fixed income strategist at Rabobank.

German 10-year yields, which serve as a refuge for investors in times of stress, hovered just above the 0.01 percent record low touched on Friday, with many analysts expecting a break below zero in the coming days. DE10YT=TWEB.

Global government bonds trading with sub-zero yields now exceed 8 trillion dollars, a record high according to JP Morgan, with Brexit only one of a myriad of reasons for investors to remain cautious.

The steady drip of economic data has highlighted an underpowered world economy despite years of heavy stimulus delivered by central banks.

Asia’s dimming economic prospects weighed on stocks and pushed oil prices back below $50 a barrel on Monday. That, in turn, further dampened the outlook for global inflation. [O/R]

A key market measure of the euro zone's long-term inflation prospects -- the five-year, five-year forward -- hit a record low around 1.36 percent EUIL5YF5Y=R.

Elsewhere, investors have all but written off the chances of the U.S. Federal Reserve raising interest rates at its policy meeting this week.

For Reuters new Live Markets blog on European and UK stock markets see here

Editing by Toby Chopra

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