Spanish Bonds Advance Amid Central Bank Bets; German Bunds Rise

Spain’s bonds rose, with 10-year securities extending an eighth monthly gain, as investors sought higher-yielding assets amid speculation central banks around the world will extend stimulus measures to boost growth.

Two- and 10-year yields fell to the lowest levels since 2010, narrowing the yield premium over German bunds, after a report showed the nation’s economy shrank at a slower pace in the first quarter. Italy’s two-year yields dropped to a record as data showed euro-area inflation slowed in April more than economists forecast, backing the case for the European Central Bank to cut interest rates at its meeting this week. German 10-year yields slid to the lowest since July.

“The rally in the periphery can run a bit further,” said Rainer Guntermann, a rates strategist at Commerzbank AG in Frankfurt. “There is plenty of liquidity in the market with the prospect of lower rates from the ECB as early as this week. The pace of contraction in Spain has started to ease slightly.”

Spain’s two-year yield fell seven basis points, or 0.07 percentage point, to 1.70 percent at 4:37 p.m. London time, after falling to 1.67 percent, the lowest level since April 2010. The 2.75 percent note due March 2015 rose 0.12, or 1.2 euros per 1,000-euro ($1,318) face amount, to 101.95.

The nation’s 10-year yield declined two basis points to 4.14 percent after dropping to 4.11 percent, the least since October 2010. The rate has dropped 92 basis points this month, the most since December 2011, while the eight-month streak is the longest since January 2005, according to data compiled by Bloomberg.

Rate Forecast

The ECB will cut its main refinancing rate from the current record-low 0.75 percent at its May 2 meeting, according to 44 of 70 economists surveyed by Bloomberg. Federal Reserve policy makers may signal they are considering increasing stimulus at a two-day meeting starting today, Pacific Investment Management Co.’s Mohamed A. El-Erian said in an interview with Willow Bay on Bloomberg Television.

Spain’s economy contracted 0.5 percent from the fourth quarter, when it shrank 0.8 percent, the National Statistics Institute said.

“It’s much less severe than the final quarter of last year,” Economy Minister Luis de Guindos said in a radio interview today. “All the leading indicators for the Spanish economy are signaling recovery.”

Italy’s two-year yield dropped as much as seven basis points to 1.08 percent, the lowest level since Bloomberg began compiling data on the securities in 1993.

Senate Approval

The nation’s Prime Minister Enrico Letta won the final confidence vote needed to install his government before taking his economic growth plan to Berlin to meet German Chancellor Angela Merkel. The two leaders are due to hold a press conference at 6 p.m. local time.

Letta, 46, won a majority in the Senate after a discussion about his program that reaffirms Italy’s commitment to budget discipline and calls for tax cuts for business, consumers and homeowners.

Germany’s 10-year bund yield was little changed at 1.22 percent after falling to 1.18 percent, the lowest level since July 23. Europe’s benchmark yield has decreased seven basis points this month.

BNP Paribas SA recommends being selling bunds, strategists led by Patrick Jacq in Paris wrote today in a note to clients.

“When it comes to the economic conditions in Europe, bad news is priced in,” as is a cut in the ECB’s benchmark rate, the analysts wrote. “We see little value at 1.20 percent.”

‘Revised Upwards’

The euro region’s annual inflation rate fell to 1.2 percent, the lowest since February 2010, from 1.7 percent in March, the European Union’s statistics office said today. Inflation has been below the ECB’s 2 percent ceiling since February. Economists had forecast a decline to 1.6 percent, according to a Bloomberg News survey.

“The chances of an ECB cut this week have been revised upwards,” Francesco Garzarelli, the London-based co-head of macro and markets research at Goldman Sachs Group Inc., said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “The market has been chasing fixed-income, particularly in Europe.”

Slovenia is selling two benchmark bonds denominated in dollars, according to a person with knowledge of the offering, who asked not to be identified before the transaction is completed. The nation is offering five-year notes and 10-year securities, the person said.

The bonds will not price today, pending a potential ratings announcement, the person said.

The rate on Slovenia’s 5.5 percent dollar bond maturing in October 2022 rose four basis points to 5.74 percent.

Spanish bonds returned 5 percent in April through yesterday, set for the best month since December 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities climbed 4.6 percent and German securities advanced 0.7 percent.