Italian Bond Yield Drops to Least Since 2006 on ECB; Bunds Slide

Italy’s government bonds rose for a fifth week, with 10-year yields falling to the lowest level since February 2006, amid speculation the European Central Bank will take further steps to stimulate growth.

Italian two-year note yields dropped below 1 percent today to a record, while Spanish 10-year yields declined below 4 percent for the first time since 2010 after the ECB cut its main refinancing rate yesterday and signaled it was open to a negative deposit rate. German bunds slumped, with 10-year yields rising the most in three months, after a U.S. government report showed employers added more jobs than economists forecast in April, damping demand for safer assets.

“The ECB left the door open for further measures to help the economy,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “The market is hoping the rate cut will help the peripheral economies to gain some momentum. Spread tightening in the periphery is continuing,” he said, referring to the securities of Europe’s higher-yielding nations.

Italy’s 10-year yield fell as much as nine basis points, or 0.09 percentage point, to 3.68 percent before reversing their decline to be six basis points higher at 3.83 percent as of 4:45 p.m. in London. The 5.5 percent bond due in November 2022 dropped 0.52, or 5.20 euros per 1,000-euro ($1,312) face amount to 113.52. The rate still decreased 24 basis points this week.

The nation’s two-year rate was little changed at 1.04 percent after sliding to 0.942 percent, the least since Bloomberg began compiling data on the securities in 1993.

‘Technically Ready’

Italian and Spanish securities led gains in European sovereigns yesterday when ECB President Mario Draghi said the central bank was “technically ready” for the deposit rate to become negative and would address any unintended consequences if it decided to act.

The ECB lowered its key interest rate by a quarter percentage point to 0.5 percent at its meeting in Bratislava, Slovakia, and cut its marginal lending rate, which banks use for overnight credit, to 1 percent from 1.5 percent.

Spain’s 10-year bond yield was little changed at 4.04 percent today, after falling to 3.94 percent, the lowest level since May 2010.

Spain’s bonds have returned 23 percent and Italy’s gained 18 percent since Draghi pledged on July 26 to do “whatever it takes” to safeguard the monetary union, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds earned 2.1 percent.

Spreads Narrow

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds narrowed as much as 17 basis points today to 271 basis points, the least since August 2011.

Italy’s 10-year spread over bunds contracted as much as 10 basis points to 250 basis points, the least since Jan. 30.

Portugal’s bonds rallied for a second day, with 10-year yields declining 16 basis points to 5.50 percent, the lowest level since October 2010. The yield on Greece’s 10-year bond dropped below 10 percent, falling as much as 74 basis points to 9.54 percent.

German bunds declined along with Treasuries after U.S. Labor Department said payrolls expanded by 165,000 workers last month following a revised 138,000 increase in March that was larger than first estimated. The median forecast of 90 economists surveyed by Bloomberg projected a 140,000 gain.

‘Big Selloff’

“The bund move is all related to U.S. payrolls,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “Payrolls were much better than people were anticipating and that’s not fitting in with the frame of mind that people have been in. It’s prompting a big selloff in core markets into the weekend.”

Germany’s 10-year yield climbed eight basis points to 1.24 percent today after declining to 1.15 percent yesterday, the lowest level since July 23. The Treasury 10-year rate increased 10 basis points to 1.72 percent.

The euro-area economy will shrink more than previously predicted this year, the European Commission said in new forecasts. Gross domestic product in the region will contract 0.4 percent, compared with a February prediction of 0.3 percent, the Brussels-based commission said.

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

Before it's here, it's on the Bloomberg Terminal.