* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest market activity, rewrites throughout)
By Dhara Ranasinghe and Yoruk Bahceli
LONDON, March 17 (Reuters) - Spanish and French borrowing costs hit 10-month highs on Tuesday as growing expectations of government spending to combat the effects of the coronavirus epidemic kept peripheral markets under pressure.
Southern European bond markets, often deemed the “periphery” of the euro zone, have been hurt by the global rout in risk assets and a comment last week from European Central Bank President Christine Lagarde on bond spreads during recent sessions.
Spain announced a 200 billion-euro aid package equal to around 20% of its gross domestic product to reduce the impact of the coronavirus on its economy.
France will mobilise 45 billion euros ($50.22 billion) in crisis measures for its companies, with the economy expected to contract 1% this year, Finance Minister Bruno Le Maire said on Tuesday.
Spain’s 10-year bond yield was up 16 bps on the day to 1.02 , rising above the 1% mark for the first time since last May. Portuguese 10-year bond yields held above 1% for a second straight day.
French 10-year bond yields touched 0.32%, their highest level since May last year, but edged down to 0.24% in late trade. On Friday, the yields were still negative.
Just a few weeks ago, France’s 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.
Other Southern European bonds remained under pressure too, with Italian 10-year yields rising to their highest since mid-June, while Greek 10-year yields, which had fallen below 1% just weeks ago, rose above 3% for the first time since May.
Across the Atlantic, the U.S. Federal Reserve revived a commercial paper funding facility it used during the 2008 financial crisis to get credit directly to businesses and households.
Germany’s 10-year bond yield rallied down from a one-month high of -0.37% to -0.43% following the Fed’s announcement. .
Analysts said it was difficult to make sense of market moves given the high level of volatility and low liquidity.
“Because of what the Fed’s just announced, there’s a bit less pressure on U.S. investors to sell European assets,” said Lyn-Graham Taylor, strategist at Rabobank.
Germany is also 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 policy of keeping its budget balanced.
Long-dated German debt yields have risen over 40 basis points from record lows reached just over a week ago - a move that coincides with signs of a fiscal spending boost from Europe’s economy and receding expectations of a rate cut after the European Central Bank left rates unchanged last week.
Pessimism among German investors slumped in March to levels last seen in the 2008 financial crisis on the coronavirus outbreak, a survey showed on Tuesday.
Analysts added that selling in U.S. and European bond markets had been exacerbated by investors selling the big, liquid assets they hold to make up for losses on other markets.
“There is lingering fear that even safe assets are being liquidated to generate cash,” said Antoine Bouvet, senior rates strategist at ING.
Reporting by Dhara Ranasinghe and Yoruk Bahceli in London Editing by Larry King and Matthew Lewis