Italian bonds advanced, pushing two-year note yields to a record low, as data showing European output contracted more than economists forecast in April boosted speculation the European Central Bank will lower interest rates.
The yield on Italian 10-year government bonds dropped below 4 percent for the first time in almost 2 1/2 years, while the rate on Irish two-year notes dropped to the lowest on record. Portuguese and Spanish 10-year yields dropped to the least since 2010 as borrowing costs across Europe tumbled. German bunds rose for a second day, with yields falling to the lowest since July, as a purchasing managers’ report showed euro-area services and manufacturing output contracted for a 15th month.
“The weaker tone in the headline and German PMIs this morning has fueled rate-cut speculation with regard to the next meeting,” Michael Leister, an interest-rate strategist at Commerzbank AG in London. “Bonds are rallying across the board, bunds as well as peripherals, which clearly shows to us that this hunt for yield is really intensifying and the market is expecting an ultra-low yield in environment to stay in place for the foreseeable future.”
Italy’s two-year yield fell five basis points, or 0.05 percentage point, to 1.18 percent at 11:01 a.m. London time, after dropping to 1.165 percent, the lowest level since Bloomberg began compiling the data in 1993. The 6 percent security due November 2014 rose 0.065, or 65 euro cents per 1,000-euro ($1,299) face amount, to 107.385.
The nation’s 10-year yield declined as much as eight basis points to 3.975 percent, the lowest since Nov. 8, 2010.