March 17, 2020 / 8:35 AM / 19 days ago

German Bund yields at one-month high, selloff in French, Spain bonds continues

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, March 17 (Reuters) - Germany’s benchmark 10-year Bund yield rose to a one-month high on Tuesday on growing expectations of higher government spending to combat the fallout from coronavirus, while borrowing costs in France and Spain hit their highest since last May.

Long-dated German bond yields have jumped 50 basis points from record lows hit just over a week ago — a move that coincides with signs of a fiscal spending boost from Europe’s biggest economy and receding expectations of a rate cut after the European Central Bank left rates unchanged last week.

Germany is ready to take on new debt if necessary to cushion the impact of the coronavirus, Economy Minister Peter Altmaier said on Monday. The comments are the clearest sign yet that Berlin is willing to put an end to its domestically cherished but internationally disputed policy of keeping its budget balanced.

“The Bund selloff is about some long-term expectations for fiscal policy,” said Peter Chatwell, head of rates at Mizuho in London. “It’s also about a dramatic scaling back of ECB rate cut expectations, after the ECB meeting last week.”

Germany’s 10-year bond yield rose to -0.40% — a one-month high.

French 10-year bond yields rose to 0.26%, their highest level since May last year.

France will mobilise 45 billion euros ($50.22 billion) in crisis measures for its companies, with the economy expected to contract 1% this year due to the coronavirus outbreak, Finance Minister Bruno Le Maire said on Tuesday.

Just a few weeks ago France’s big bond market was benefiting from heightened global volatility. But sentiment has soured as investors bet that dealing with the effects of coronavirus will blow a bigger-than-expected hole in the country’s finances.

A selloff in peripheral bond markets, hurt by the global rout in risk assets and a comment last week from ECB chief Christine Lagarde on bond spreads, has spilled over into other euro zone debt markets, analysts said.

Spain’s 10-year bond yield was up 6 bps on the day at 0.90% , also hitting its highest level since last May.

Portuguese 10-year bond yields held above 1% for a second straight day.

Italian debt yields were broadly lower after having risen sharply on Monday, but analysts noted that bond markets remained highly volatile. (Reporting by Dhara Ranasinghe; Editing by Catherine Evans)

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