Spanish yields hovered low; Italian bond set for biggest falls in six weeks

Italian bond yields were set for their biggest weekly falls in six weeks on Friday and Spanish yields hovered close to their lowest levels since late 2016, reflecting a pick up in appetite for southern European bond markets.

In early trade, benchmark 10-year bond yields across the euro area were little changed with focus on flash inflation numbers for the bloc and key U.S. jobs data later this session. As the week draws to a close, it was the move in southern European bonds that stood out.

Relief that S&P Global kept Italy's ratings unchanged and Sunday's election in Spain past without any major upsets, sparked a fall in bonds yields and rise in prices at the start of the week. That move gathered pace as data lifted hopes of a recovery for regional economies: the Spanish manufacturing sector for instance expanded in April at its fastest rate since January, data showed on Thursday.

"Near-term, this dynamic (in the periphery) looks set to extend," said Christoph Rieger, head of rates at Commerzbank. "This week's GDP data was better than expected and PMIs show improvements in the periphery while Germany has faltered."

Italy's 10-year bond yield was marginally higher at 2.55 per cent, near over two-week lows hit the previous session. It is down 2.5 basis points on the week, which would mark its biggest weekly fall in six weeks. Spain's 10-year bond yield was flat on the day at around 1 per cent, having hit its lowest since late 2016 on Thursday at around 0.97 per cent.

It has fallen 2.5 bps this week, while German Bund yields have risen almost 5 bps. That has left the Spanish/German bond yield gap at around 95 bps, its tightest in around seven months. James McCormick, global head of desk strategy at NatWest Markets, said he was bullish on Spain long-term and started selling German Bunds last week.

"In Europe, we're long Spain versus Germany and France," he said. "With that, you get the best-performing economy of the majors in the eurozone and we're past the event risk of the election." Other analysts noted big flows into peripheral bonds this week, which they suspected was cross-asset investors shifting funds from equity to fixed income markets.

Focus turned to April eurozone inflation data, with a pick up in consumer prices anticipated following solid data from Germany earlier this week. Economists expect annual euro zone inflation to accelerate to 1.6 per cent in April from 1.4 per cent in March.