* Portugal/Germany 10-year yield spread hits almost-four
* Spain resilient following ratings outlook boost from S&P
* Upcoming data could affect pace of U.S. rate hikes
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, April 3 Portugal and Italy saw their
10-year borrowing costs spike compared to Germany on Monday as
the European Central Bank reduced its asset purchases, putting
pressure on lower-rated members of the bloc.
From April, the central bank is cutting its monthly asset
purchases to 60 billion euros of bonds from 80 billion in what
markets see as a first step towards normalisation of monetary
Though policymakers last week stressed that rate rises are
not on the cards in the near future, lower-rated South European
states are the biggest beneficiaries of stimulus and most
vulnerable to any hints of policy tightening.
"We are now in the new environment of only 60 billion euros
(of bond purchases), and though this was well telegraphed it
seems to be negative for peripheral spreads," said Commerzbank
strategist David Schnautz.
The yield gap between Portugal's 10-year government bond
and the German benchmark 10-year bond hit an
almost four-week high of 368 basis points, up 4 bps on the day.
Italy's 10-year borrowing cost gap over Germany hit 203 bps,
its highest since March 24.
"But notably the positive news from S&P on Spain from last
week seems to be outweighing the reduced purchases," Schnautz
Ratings agency S&P Global last week revised its sovereign
credit outlook for Spain to positive from stable, increasing the
chances of an upgrade from its current BBB+ at the country's
Spanish 10-year bond yields edged lower on the
day, almost keeping pace with better-rated euro zone countries.
Most euro zone government bond yields have risen in recent
months, but investors have tended to view Spain in a kinder
light than similarly-rated Italy. Spain's 10-year borrowing
costs are 68 bps lower, not far from a five-year high of 75 bps
hit late in March.
DZ Bank analysts say this divergence between higher and
lower-rated countries within the bloc could continue as French
presidential elections loom.
"As the first round of the French presidential elections
will take place this month, reduced ECB purchases should lead
not only to generally rising yields in the euro area, but also
to wider cross-market spreads, which should weigh above all on
the periphery and France," the analysts said in a note.
French and peripheral bond yields have risen in recent
months on the outside chance that far-right leader Marine Le Pen
wins the keys to the Elysee Palace and pushes for a French exit
from the single currency.
Investors will also look at U.S. manufacturing activity data
at 1400 GMT. Economists polled by Reuters forecast the ISM PMI
at 57, down from 57.7 in the previous month.
"This is the first key economic indicator of the quarter for
the U.S. and should give us some idea of whether the Fed will go
forward with three rate hikes this year," said DZ Bank
strategist Daniel Lenz.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Editing by Catherine Evans)