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Southern European bond yields rise as Spain introduces new Covid restrictions

* Euro zone periphery govt bond yields

LONDON, Oct 30 (Reuters) - European government bond yields rose on Friday as Spain joined other countries on the continent in imposing tougher rules to curb the spread of the coronavirus.

Spain will be under a state of emergency until early May, giving regions legal backing to decide curfews and restrict travel to try and contain rampant COVID-19 contagion.

“Tighter covid-related restrictions across Europe, this time in Spain and the UK, remain the main theme and allowed EU and U.S. government bonds to recover their supply-related weakness from the U.S. session,” ING analysts said in a note to clients.

The day before, southern European bonds yields had fallen - some to their lowest in 10 days - after the European Central Bank signalled it would provide more stimulus at its next meeting to contain the effects of a second wave of coronavirus infections.

Most analysts believe that the ECB will extend the pandemic emergency programme (PEPP) in December, with some saying that the targeted liquidity operations (TLTROs) should also be on the agenda. Few expect a rate cut. Money markets project a 25% probability the ECB will lower the benchmark interest rate to -0.60% from the current -0.50%.

“Even with the Covid-19 situation worsening, this leaves room for spreads to tighten and rates to grind lower,” ING analysts said.

Italian 10-year BTP yields were last trading up 1.3 basis points at 0.71%. Spanish 10-year government bond yields were up 2 bps at 0.15%. The rest of the peripheral market also rose by 1 to 2 bps.

Greek five-year yields increased 6.1 bps to 0.31% . Greek bonds are rated junk and only eligible for ECB emergency bond buying.

Benchmark German 10-year Bund yields were up by 1.8 bps at -0.61%, taking the hint from their U.S. counterparts on Thursday, when they rose on the long end of the curve as the stock market retraced some earlier losses.

German retail sales fell more than expected in September, data showed on Friday, dampening hopes that household spending would helped to drive a recovery in Europe’s largest economy.

Traders will be looking for flash euro zone third-quarter gross domestic product and inflation data at 1000 GMT. (Reporting by Olga Cotaga)