* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
By Yoruk Bahceli
AMSTERDAM, Jan 13 (Reuters) - Euro zone bond yields dipped on Wednesday, with Italian bonds lagging Germany's as uncertainty over the government in Rome weighed on sentiment.
Italy's former Prime Minister Matteo Renzi said on Tuesday that Italy should apply for a loan from the euro zone's bailout fund. He told current premier Giuseppe Conte he was ready to sink his government if he refused, which could lead to a major cabinet reshuffle.
Ten-year Italian government bond yields were down 2 basis points to 0.62% in early trade on Wednesday after an 10 bps rise on Tuesday delivered their worst session since early November.
Five-year Italian yields returned to negative territory after rising above zero for the first time since mid-November on Tuesday.
Although Tuesday's moves reflected political uncertainty, this has not materially raised the likelihood of a snap election, bond analysts said, and Wednesday's price action so far supported that view.
Investors took the opportunity to take profits on Italian government bonds, they said, after the risk premium offered had fallen to its lowest since 2016.
On Wednesday the closely-watched gap between 10-year Italian and German yields - effectively the risk premium on Italian debt - rose to 111 basis points, its highest in nearly a week.
"If Renzi leaves the government, it could trigger a reshuffle and a new government, but the impact on the Italian government bonds should not be long lasting," Jens Peter Sorensen, chief strategist at Danske Bank in Copenhagen, said.
"We expect the spread to stabilise as this is more on internal political noise in the Italian government rather than Italy's commitment to Europe."
Italy's risk premium rose as benchmark German 10-year yields fell 3 basis points after rising on Tuesday in tandem with U.S. Treasuries.
The focus will also be on debt sales, after Spain received 88 billion euros ($107.31 billion) in initial demand for a 10-year bond it is selling via a syndicate of banks, Refinitiv capital markets news service IFR said.
In auctions, Germany will sell a new five-year bond to raise 5 billion euros, while Portugal will re-open bonds due 2030 and 2035 in an auction to raise up to 1.25 billion euros.
The Federal Reserve will also be monitored, with several speakers lined up on Wednesday as hopes for reflation under Joe Biden's upcoming administration have pushed U.S. Treasury yields higher. ($1 = 0.8201 euros) (Reporting by Yoruk Bahceli; editing by Barbara Lewis)