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Government Bonds Surge as Italian, Irish Yields Drop to Records

European government bonds rose, with Italy’s two-year yields falling to a record, as euro-area output contracted for a 15th month in April, boosting speculation the region’s central bank will lower interest rates.

The yield on Italian 10-year government bonds fell below 4 percent for the first time in almost 2 1/2 years, while Spanish and Portuguese yields dropped to the least since 2010. Borrowing costs in France and Ireland declined to the lowest on record as a purchasing managers’ index showed German services and manufacturing unexpectedly shrank. Benchmark German 10-year bund yields slid to the lowest since July.

“The weaker tone in the headline and German PMIs this morning has fueled rate-cut speculation with regard to the next meeting,” said 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 environment to stay in place for the foreseeable future.”

Italy’s two-year yield fell six basis points, or 0.06 percentage point, to 1.17 percent at 4:47 p.m. London time, after reaching 1.125 percent, the lowest level since Bloomberg began compiling the data in 1993. The 6 percent security due November 2014 rose 0.09, or 90 euro cents per 1,000-euro ($1,302) face amount, to 107.41.

The nation’s 10-year yield declined as much as 17 basis points to 3.89 percent, the lowest since Oct. 27, 2010.

Output Falls

A euro-area composite index based on a survey of purchasing managers in both industries held at 46.5, London-based Markit Economics said.

A gauge of German manufacturing from a survey by Markit fell to 47.9 from 49 the previous month, while the median estimate of 29 economists in a Bloomberg News survey was for no change. For services, the index declined to 49.2 from 50.9. Economists had predicted an increase to 51. Readings below 50 show contraction.

The European Central Bank next meets on May 2. Policy makers have kept the main refinancing rate at a record-low 0.75 percent since July.

“The data is sufficiently weak to up the pressure on the ECB to cut rates in June,” Lena Komileva, managing director at G+ Economics Ltd., wrote in an e-mailed note today. “The only question is why the ECB has not cut rates already.”

Yields Tumble

The yield on Spanish 10-year bonds posted the biggest intraday slide since Oct. 17, falling as much as 26 basis points to 4.24 percent, the lowest since Nov. 1, 2010, while the rate on similar-maturity Portuguese debt dropped 14 basis points to 5.74 percent, the lowest since Oct. 27, 2010.

Spain’s recession eased in the three months ended March 31, even as the economy shrank for a seventh quarter, the Bank of Spain said today in its monthly bulletin. Gross domestic product fell 0.5 percent from the prior three months, when it contracted 0.8 percent.

Volatility on Spanish bonds was the highest in euro-area markets today followed by those of Italy and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Irish two-year yields tumbled as much as 15 basis points to 0.844 percent, the least since Bloomberg began compiling the data in 2003. The nation’s 10-year bond yield dropped to 3.48 percent, the lowest since 2006.

The ECB may cut interest rates if data show a need for it, Executive Board Member Joerg Asmussen said April 20 on a panel in Washington. ECB President Mario Draghi said April 19 the economic situation in the 17-nation euro area hasn’t improved since the central bank’s last meeting on April 4.

Bunds, Treasuries

German 10-year bund yields dropped as much as four basis points to 1.19 percent, the lowest since July 24. The rate on similar-maturity U.K. gilts fell to 1.62 percent, the least since Sept. 5 and the Treasury 10-year note yield slid to 1.64 percent, the lowest since Dec. 12.

The yield on Austrian five-year notes declined to 0.524 percent, the least since Bloomberg began tracking the data in 1993. France’s 10-year bond yield slipped as much as five basis points to 1.701 percent, also a record.

France is due to repay more than 30 billion euros of bills and bonds on April 25, according to data compiled by Bloomberg.

Italian bonds returned 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds gained 6.3 percent, while German debt rose 0.9 percent.

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