* Spain rallies as investors pile cash into risky assets
* Spain/Italy spread narrows, tightening may hit resistance
* U.S. data boosts risk rally, dents German Bund demand
By William James and Emelia Sithole-Matarise
LONDON, March 8 (Reuters) - Spanish bond yields sank to their lowest level in over a year as investors piled money into riskier bonds in search of higher yields and spurred on by better than expected U.S. jobs data.
Spain was the top performer among euro zone bonds, rallying faster than Italian debt and drawing demand from less risky assets like German bonds, where yields rose on the day.
The moves continued a trend among bond investors seen for much of the week as concerns about Italy’s electoral stalemate faded into the background and the desire to put cash reserves to work in the market stimulated risk-taking.
Spanish 10-year yields fell to 4.76 percent, closing in on levels last seen in early February 2012 when banks were using cheap European Central Bank loans to buy peripheral debt. Equivalent Italian yields also fell, but by a much smaller 2 bps to stand at 4.59 percent.
“Spain is benefiting a lot from not being Italy at the moment. The Spain/Italy spread has hugely compressed with all the trouble in Italy around the election - a lot of people have switched from Italy into Spain,” a trader said.
Spain’s 10-year yield premium over Italy fell to its lowest since last April, tumbling to 17 basis points from nearly 100 bps before the Italian elections as perceptions of contagion risks have receded, supported by the ECB’s scheme to buy bonds of struggling states that ask for aid.
The pace of the Spanish/Italian spread tightening has prompted Citi strategists to recommend investors book profits near-term though they still see Spanish yields trading at the same level as Italy in coming weeks or months.
“We would recommend selling the (Italian) rally when it shows signs of stalling. The net sell-off after the election appears to us too little to compensate for the magnitude of the risks opened up,” they said in a note.
German debt, the low-yielding safe haven used by investors as a shelter in times of crisis, suffered in the clamour for riskier bonds. Bund futures fell 30 ticks to 142.53 and 10-year yields rose 3 bps to 1.52 percent.
The selloff came mostly after U.S. non-farm payrolls data exceeded expectations by a large margin.
“It was a very good payrolls report, and also the decline in the unemployment rate was taken positively by the market. It confirms that there appear to be some good improvements in place in the U.S. economy,” said Neils From, chief analyst at Nordea in Copenhagen.
Spanish bonds also accelerated their rally on the back of the data, having earlier benefited from the positive effects of a strong debt sale on Thursday.
As well as helping improve financial market confidence, investors see growth in the U.S. economy as potentially stimulating output in other regions, easing the difficulty of debt reduction in Europe’s recession-budened countries.
“If the U.S. economy is improving and showing signs of picking up, it might ease the pain in southern Europe as well and that is supportive for peripherals,” From said.