* Italy’s 10-year bond yield rises to 1.02%
* Italy, Spain spread over Germany widen
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds Spanish syndication)
By Dhara Ranasinghe
LONDON, Feb 25 (Reuters) - Southern Europe’s bond markets succumbed to selling pressure on Tuesday as concern that Italy may not be alone in facing the coronavirus outbreak gripped markets.
The coronavirus death toll climbed to seven in Italy on Monday and several Middle East countries were dealing with their first infections, sending markets into a tailspin on Monday.
Tuesday’s trade gave way to fresh selling of not just Italian bonds but also Greek, Spanish and Portuguese debt.
Italian authorities on Tuesday reported a woman had tested positive for coronavirus in Sicily, the first case south of Rome.
“What’s different today is that we are seeing more of a peripheral bond selloff,” said Lyn Graham-Taylor, a rates strategist at Rabobank in London.
“Coronavirus is not an Italy-specific problem, but it could become a more global problem so that is what people are starting to price in.”
Italy’s 10-year bond yield rose as much as 4 basis points to 1.02%, its highest level in almost a month. It rose 6 bps on Monday in its biggest one-day rise in over two months as Italy grappled with the worst flare-up of the virus in Europe.
The sell-off calmed in late trade and Italy’s 10-year yield was last up 1 basis point at 0.98%.
In a sign of increased risk aversion, investors plumped for the safety of top-rated German government bonds - pushing the 10-year Bund yield to its lowest since early October at -0.52% .
This in turn saw the gap between German Bund yields and their peripheral peers widen. The Italian/German 10-year bond yield gap touched its widest in a month at around 152 bps .
Demand for a Spanish sale of 30-year bonds was also tempered, with orders declining during the sale and at 18 billion euros, falling far short of the record 52 billion euro demand its 10-year sale received in January.
Spain’s and Portugal’s 10-year bond yield spreads over Germany widened to 73 bps and 69 bps - their widest in more than two months.
Greek bonds also came under selling pressure, with 10-year yields last up over 6 bps at 1.06%. They fell below 1% for the first time just two weeks ago.
Investors, bracing for the coronavirus outbreak to hit the world economy, have pushed up expectations for rate cuts from the U.S. Federal Reserve and European Central Bank.
Euro zone money markets attach more than 60% chance of a 10 bps rate cut by the ECB by July, up from around 35% a week ago.
“Pricing for some future action is fair, but that rate cuts of this magnitude, at this level, are not likely to have any effect, beyond giving the appearance that the ECB is paying attention to the potential hit to growth and acting in the only way they can,” said Tim Graf, chief macro strategist at State Street Global Markets in London.
Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli, editing by Larry King and Giles Elgood