london july 18 reuters  euro zone borrowing costs rose sharply on monday on improving risk appetite as investors scaled back expectations of outsized interest rate hikes in the euro area and the united states while political turmoil in rome weighed on italian bonds caution ahead of this weeks european central bank ecb meeting kept bond markets in a defensive mood with italy still in the spotlight italys prime minister mario draghi tendered his resignation last week after one of the parties in his broad coalition the 5star movement refused to back the government in a parliamentary confidence vote president sergio mattarella rejected his resignation however and asked draghi to address parliament this week in the hope that he can find a consensus to stave off early elections read more italys 10year bond yield rose 12 basis points bps to as high as 349  briefly pushing the closely watched spread over german bund yields to its widest level in over a month at around 235 bps  at 1045 gmt the spread was just 3 bps wider at around 225 bps the spread is pretty static given clearly that the risk of an early election has increased over the weekend said richard mcguire head of rates strategy at rabobank part of that is that the hatches are battened down ahead of the antifragmentation tool announcement from the ecb mcguire added saying it was difficult to short italian bonds now given the lack of clarity ahead of thursdays european central bank meeting the ecb is expected to announce details of this new tool aimed at containing stress in bond markets as it looks to raise interest rates for the first time in 11 years it has flagged a 25 bps rate hike and money markets price in around a 35 chance of an outsized 50 bps move down from around 40 on friday according to refinitiv data the repricing of ecb expectations and the dampening of expectations of a larger 100 bps hike from the federal reserve later this month helped riskier assets such as equities and weighed on euro zone bonds analysts said germanys 10year bond yield the benchmark for the bloc was up 95 basis points at 1217  pulling away from sevenweek lows hit on friday weve had a positive tone in terms of equities as the market looks at future policy decisions from the fed and the ecb a little bit more constructively and priced out nearterm tightening mcguire said even so markets are still pricing in around 160 bps of tightening from the ecb by yearend implying that a hike of at least 50 bps could come at one or more of the ecbs next four meetings reporting by samuel indyk additional reporting by dhara ranasinghe editing by dhara ranasinghe gareth jones and hugh lawson