Spanish Note Yield Drops to Record on Manufacturing Data

Spanish and Italian government bonds advanced, with Spain’s two-year yield dropping to a record, as industry reports showing growth in euro-area manufacturing fueled speculation the region’s recovery is gaining momentum.

Italian 10-year yields declined below 4 percent for the first time since May, shrinking the premium investors demand to hold the securities instead of similar-maturity German bunds to the least in 2 1/2 years. German government securities fell as demand for the region’s safest assets waned. German bunds lost 2.1 percent last year, the worst performer of 15 euro-area sovereign-debt markets tracked by Bloomberg World Bond Indexes.

“We’ve had some good data in Europe, that’s supported a general risk-on theme in fixed income,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “People are starting the new year with a bit more firepower and are able to get onto some risk-on trades in the periphery,” he said, referring to the securities of Europe’s higher-yielding debt markets.

Spain’s two-year yield slid 21 basis points, or 0.21 percentage point, to 1.18 percent at 4:27 p.m. London time after dropping to 1.169 percent, the lowest since Bloomberg began compiling the data in 1993. The 3.75 percent note maturing in October 2015 rose 0.37, or 3.70 euros per 1,000-euro ($1,368) face amount, to 104.57.

The nation’s 10-year rate declined 17 basis points to 3.97 percent.

The Italian 10-year yield dropped 12 basis points to 3.97 percent after falling to 3.96 percent, the least since May 23. The spread of the securities over similar-maturity bunds shrank to as little as 202 basis points, the narrowest since July 2011.

Factory Growth

Euro-area manufacturing expanded for a sixth month in December, Markit Economics said, citing a survey of purchasing managers. The index was 52.7, matching the previous estimate released on Dec. 16, and above the level of 50 that indicates growth. The reading for Italy climbed to 53.3 from 51.4 in November, while Spain’s was 50.8, beating a forecast of 49.8 in a Bloomberg News survey of economists.

Spanish two-year note yields surged to a euro-era record 7.147 percent in July 2012 as the region’s worsening debt crisis spurred concern the euro would be dismantled. They have fallen since European Central Bank President Mario Draghi said that month that policy makers would do “whatever it takes” to safeguard the single currency.

German Bunds

Germany’s 10-year bund yield increased one basis point today to 1.94 percent after climbing to 1.97 percent, the highest level since Sept. 23.

The German benchmark will climb to 2.25 percent by year-end, according to the median estimate of 16 economists and strategists in a Bloomberg News survey.

Investors have been waiting for the start of the new year to allocate funds to the euro-area’s higher-yielding bond markets, according to Luca Jellinek, head of European rates strategy at Credit Agricole Corporate & Investment Bank.

“Late 2013 we heard a repeated refrain from clients, which was: ‘I’ll buy more periphery in the new year,” London-based Jellinek said. “It makes sense if you’ve already made money. The PMIs of Italy and Spain were robust and that always helps.”

Greek securities returned 48 percent last year, the best performer of the 15 euro-area sovereign-debt markets tracked by Bloomberg World Bond Indexes. Spanish bonds rose 11 percent and Italy’s gained 7.6 percent.

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