Spain Leads Bond Rally With Yields Falling to Records

The government bonds of Spain, Italy and Ireland rose this week, pushing the nations’ 10-year yields to record lows, as improving economic data and the prospects of additional European Central Bank stimulus buoyed demand.

Benchmark German 10-year bunds climbed for a second week, with yields falling to the least in 11 months, before the ECB governing council meet in Brussels next week. A report yesterday showed euro-area manufacturing grew in April at the fastest pace in three months.

“We’re still in a world where investors are starved of return,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “People are still happy to diversify their holdings and buy bonds that not so long ago they would have shied away from. The slightly better data helps reassure people that finally some of these weaker countries are turning a corner.”

Spain’s 10-year yield fell nine basis points this week, or 0.09 percentage point, to 2.98 percent at 5 p.m. London time yesterday after dropping to 2.971 percent, the lowest since Bloomberg began compiling the data in 1993. The 3.8 percent bond maturing in April 2024 rose 0.765, or 7.65 euros per 1,000-euro ($1,386) face amount, to 107.025.

The rate on similar-maturity Italian debt declined six basis points to 3.04 percent. It earlier slid to 3.033 percent. Ireland’s 10-year yield slipped seven basis points to 2.78 percent after touching 2.771 percent.

Spanish Growth

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.

Investors are buying the 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 slipped to 2.24 percent on May 1, down from as high as 9.55 percent in November 2011, 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 in April from 53 in March, exceeding a preliminary reading of 53.3 published on April 23. The measure has been more than 50, indicating expansion, for the past 10 months.

Spain’s securities earned 7.3 percent this year through May 1, according to Bloomberg World Bond Indexes. Italy’s returned 6.7 percent and Germany’s gained 3.2 percent.

Data on April 30 showed the annual inflation rate in the euro area rose to 0.7 percent last month from 0.5 percent in March. ECB President Mario Draghi said in Amsterdam that the Frankfurt-based central bank may start broad-based asset purchases, or quantitative easing, if the inflation outlook worsens. Policy makers meet on May 8.

“That inflation number was not so weak that it would force their hand,” said Bank of America’s Wraith. “If they knock talk of QE effectively on the head that’s not going to stop the yield spread narrowing in its tracks or trigger a meaningful reversal.”

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