* 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 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
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.