Spanish, Italian, Irish Bond Yields Drop to Records

Spain’s 10-year government bond yield fell to a record amid signs its economy is emerging from a six-year slump and as the European Central Bank ponders further monetary stimulus.

Italian and Irish 10-year yields also reached record lows as a report showed euro-area manufacturing grew in April at the fastest pace in three months. The rate of job creation in the U.S. picked up last month, according to economists in a Bloomberg News survey before the data today. The ECB will announce its decision next week as it weighs embracing policies ranging from negative interest rates to quantitative easing.

“This morning’s move is still a function of yesterday’s dynamics when we saw Treasuries printing new lows,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London. “This is feeding through into European markets with fixed income very well supported. Once the payrolls are out markets will go back to fretting about the ECB prospects.”

Spain’s 10-year yield fell four basis points from April 30, or 0.04 percentage point, to 2.98 percent at 12:05 p.m. London time. The 3.8 percent bond maturing in April 2024 rose 0.3, or 3 euros per 1,000-euro ($1,386) face amount, to 106.98.

Italian Yields

The rate on similar-maturity Italian bonds was two basis points lower at 3.05 percent after dropping to 3.047 percent, the lowest since Bloomberg began compiling the data in 1993. That on equivalent-maturity Irish debt slid to 2.808 percent.

Treasury 10-year yields increased one basis point to 2.63 percent after falling to 2.59 percent yesterday, a level not seen since March 3.

European government bond markets were shut yesterday for public holidays.

Investors have snapped up 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 2.19 percent on April 23, the lowest in the euro era, according to Bank of America Merrill Lynch Indexes.

A euro-region gauge of manufacturing based on a survey of purchasing managers increased to 53.4 last month from 53 in March, Markit Economics said today. That exceeded a preliminary reading of 53.3 published on April 23. The measure has exceeded 50, indicating expansion, for the past 10 months. A measure of Italian factory output rose to 54 last month, the highest since April 2011.

Consumer Prices

Spanish growth picked up in the first quarter and consumer prices resumed increases in April, underpinning a recovery in the euro zone’s fourth-largest economy. Prime Minister Mariano Rajoy forecast this week that Spain will surpass the budget deficit target set by its European Union peers.

The additional yield investors demand to hold Spanish 10-year bonds over equivalent-maturity German bunds declined to 152 basis points. A drop below 150 basis points could see further spread narrowing, according to Richard McGuire, head of rates strategy at Rabobank International in London.

“We have been arguing that 125 basis points or possibly 100 basis points are feasible targets for this spread, which, admittedly, has seen some push back from our Spanish clients,” McGuire wrote in an e-mailed note today. “This resistance points to this spread possibly narrowing very rapidly should it break convincingly sub-150 basis points as currently skeptical domestics are coerced into joining the move.”

U.S. payrolls increased by 218,000 in April, up from a gain of 192,000 the previous month, according to a Bloomberg survey of economists before the Labor Department releases the report today.

Spain’s securities earned 7.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s returned 6.7 percent and Germany’s gained 3.2 percent.

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