March 16, 2020 / 9:20 AM / 25 days ago

UPDATE 3-Southern European, French borrowing costs jump as risk aversion grows

(Updates prices to close)

By Yoruk Bahceli

LONDON, March 16 (Reuters) - Southern European bond yields jumped to multi-month highs on Monday as investors fled from riskier assets after a second rate cut by the U.S. Federal Reserve and coordinated central bank action to address the impact of coronavirus.

German 10-year bond yields rose to a three-week high, reflecting increased expectations for a fiscal spending boost to mitigate the blow from the coronavirus outbreak.

Germany’s fiscal measures to counter coronavirus will impact the federal budget plans from 2021, Finance Minister Olaf Scholz said in a letter.

The Fed cut rates for the second time in less than two weeks on Sunday, to 0%-0.25%, and major central banks cut pricing on their swap lines to provide dollars to financial institutions around the world.

The moves failed to calm markets. Stocks and the dollar fell , moves echoed by riskier Southern European debt.

Spain went into partial lockdown on Saturday as part of a 15-day state of emergency. Non-essential venues also closed in France, raising concern over the economic impact such drastic measures may have, especially for highly-indebted economies.

Spanish and Portuguese 10-year bond yields rose over 20 bps to 9-1/2 month highs at 0.85% and 1.06% respectively. Portugal’s 10-year bond yield rose above 1% for the first time since May last year .

The Spanish/German 10-year bond yield gap touched its highest since October 2018 at 136 bps. French 10-year yields touched 3-1/2 month highs at 0.14%.

Italian 10-year yields rose more than 30 basis points at 2.18%, breaching the 2% mark for the first time since July.

“The momentum we’ve seen in the periphery is largely to do with the sentiment towards debt metrics in countries which, after many, many years of quantitative easing and existing central bank support within the euro zone, are going into another fairly significant if not larger crisis than the one before,” said Rabobank strategist Matt Cairns.

Southern European bond markets, often referred to as the “periphery”, are the most indebted in the euro zone.

The region’s debt has been hurt since European Central Bank chief Christine Lagarde said last Thursday it was not the ECB’s job to “close spreads”, referring to the risk premium on Southern European debt.

Lagarde apologised to her fellow policymakers for those comments, according to a Financial Times report on Sunday.

Higher-rated debt yields also rose on Monday, with Germany’s 10-year benchmark up 13 bps to -0.45%. Dutch yields rose 13 bps to -0.21%.

“It is quite illustrative to note that longer bond yields have not made new lows despite free-falling equity prices, further weakening in the economic outlook and the Fed’s large easing package,” Nordea chief analyst Jan von Gerich said in a note.

“The floor in bond yields is starting to become visible again. This does not mean yields would rise considerably any time soon,” he said.

Euro zone inflation expectations tumbled to new record lows below 0.84%, far off the ECB’s near 2% target.

“There are concerns about inflation going forward and how inflation will be left after this crisis is behind us, because it was already very low and the European economy was already very weak,” said ING senior rates strategist Antoine Bouvet.

Reporting by Yoruk Bahceli with additional reporting by Dhara Ranasinghe Editing by Mark Heinrich

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