Italian government bonds rose, pushing 10-year yields below 3 percent for the first time, as services data added to signs of recovery in the euro area that are bolstering demand for higher-yielding assets.
Spain’s 10-year yields dropped to an all-time low as a separate report showed unemployment in the country fell last month, signaling governments in the region are overcoming the debt crisis that began in 2008. Portuguese and Irish bonds also gained as Fitch Ratings said there is potential for upgrades in the euro region’s peripheral nations. German bunds were little changed as BNP Paribas SA said 10-year yields that fell to the lowest level in 11 months yesterday were unattractive.
“Economic fundamentals in the peripheral countries are improving and that explains the rally here,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “Spread compression has further to go. This trend is not yet over.”
Italy’s 10-year yield fell four basis points, or 0.04 percentage point, to 3.01 percent at 4:34 p.m. London time after dropping to 2.987 percent, the lowest since Bloomberg began collecting the data in 1993. The 4.5 percent bond maturing in March 2024 rose 0.32, or 3.20 euros per 1,000-euro ($1,393) face amount, to 112.82.
Spain’s 10-year rate dropped four basis points to 2.95 percent after declining to 2.931 percent. Portugal’s declined three basis points to 3.57 percent and Ireland’s slipped three basis points to 2.74 percent.
Investors are buying bonds of peripheral euro-area nations amid signs the region’s debt crisis is being consigned to history. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.20 percent yesterday from last year’s high of 4.02 percent set in June, according to Bank of America Merrill Lynch Indexes.
A measure of services in the euro region climbed to 53.1 in April, the highest since June 2011, from 52.2 the previous month, Markit Economics said, citing a survey of purchasing managers. Gauges of services activity in Spain, Ireland and Italy all improved, separate data showed. Spanish jobless claims fell 111,565 in April, the Labor Ministry said.
The extra yield investors demand to hold Spain’s 10-year bonds instead of German bunds shrank as much as six basis points to 146 basis points, the narrowest since August 2010. Italy’s contracted six basis points to 152 basis points, the least since May 2011.
“Fitch believes that Ireland, Portugal and Spain have the greatest medium-term potential, in a favorable scenario, for multi-notch rating recoveries,” the rating company said in a report. “We do not envisage any sovereigns in the euro-zone periphery recapturing pre-crisis rating levels in the foreseeable future. This reflects not only the long and difficult adjustment path ahead, but also the legacy of the crisis.”
Fitch rates Ireland and Spain at BBB+, and Portugal one notch below investment grade at BB+. The company increased Spain’s rating by one step on April 25. Standard & Poor’s and Moody’s Investors Service are both scheduled to review Portugal’s rating on May 9, according to calendars provided by the companies.
Germany’s benchmark 10-year yield was at 1.46 percent after declining to 1.44 percent yesterday, matching the lowest since May 27 last year.
European Central Bank policy makers will meet in Brussels on Thursday amid speculation they will discuss potential new stimulus measures to boost inflation in the region. All but two analysts surveyed by Bloomberg forecast the ECB will leave its key rate at a record-low 0.25 percent.
“Below 1.5 percent, the 10-year bund is not attractive at all in risk-reward terms,” BNP strategists including Patrick Jacq in Paris wrote in an e-mailed report. “We expect more significant movement to build gradually during the week. Of course, the ECB council meeting will be the focus.”
Germany will auction 5 billion euros of securities due in 2019 tomorrow and Spain will sell as much as 4.5 billion euros of debt due in 2017, 2020 and 2028 on Thursday.
Italian government securities earned 7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 7.5 percent and Germany’s gained 3.3 percent.
Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Ireland and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.