Sept 9 (Reuters) - Italy led a rise in euro zone bond yields on Friday following reports that European Central Bank policymakers are likely to kick off a debate next month about whittling down the Bank's 4-trillion-euro bond pile.
The ECB hiked rates on Thursday by 75 basis points and has flagged further policy tightening to contain inflation.
Four sources told Reuters that a debate on balance sheet reduction could start next month, with some hoping for a decision in December on what they see as the next step in their fight against runaway inflation.
A winding down of the ECB balance sheet would mark another step towards policy normalisation and is also known as quantitative tightening.
It would impact markets, especially highly indebted ones such as Italy, that have relied on the ECB as a major buyer for years.
"I do take this seriously," said ING senior rates strategist Antoine Bouvet, referring to the reports on balance sheet reduction.
"The hawks have persistently primed markets for it since the summer so this discussion will happen," he said. "The result may well be a very gradual reduction in the ECB’s portfolio, but it seems they see the current inflation spike as a window of opportunity."
Italy's 10-year bond yield was last up 7 basis points on the day at 4.01%. Spanish, Portuguese and Greek 10-year bond yields were 2-5 bps higher .
Germany's 10-year Bund yield was about 2 bps lower on the day but had been lower earlier on.
"It seems a bit early to talk about a severe quantitative tightening by the ECB, similar to what the Fed is doing in the U.S.," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.
"Of course, such a move would impact the market with a possible yield rise."
French ECB policymaker Francois Villeroy de Galhau said on Friday inflation would stay high next year and should be brought back to around 2% by 2024.
Deutsche Bank said it expected the ECB to deliver another supersized rate hike in October
There was also some focus on a meeting of EU energy ministers on Friday. They tasked the European Commission to press ahead with a cap on the revenues of non-gas power producers benefiting from soaring energy prices, while backing away from capping Russian gas prices.
Euro zone finance ministers meanwhile agreed to act together to protect households and companies from soaring energy prices, coordinating their support policies with the ECB to avoid adding to inflation.
This may have helped provide some support to debt markets, analysts said.
"We’re moving from that widespread assumption that fiscal policy will make the ECB’s job harder or at least allow them to keep hiking to a more balanced view," said ING's Bouvet.
(Reporting by Stefano Rebaudo and Dhara Ranasinghe, Editing by Jane Merriman, Mark Potter and Nick Zieminski) ;))
