* Portugal/Germany 10-year yield spread hits almost-four week high
* 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 (Reuters) - 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 policy.
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 added.
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 next review.
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.
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Editing by Catherine Evans