* Spanish, Italian premiums over Bunds fall below 200 bps
* Spanish jobless data reinforces improved economic outlook
* "Light at the end of the tunnel" - strategist
By Ana Nicolaci da Costa
LONDON, Jan 3 Spanish government bond yields hit
their lowest level since September 2010 on Friday after a drop
in the country's jobless rate underpinned sentiment and fuelled
a bond rally.
The number of registered jobless in Spain fell by 2.24
percent in December. It was the biggest drop ever for that
month, and the second biggest fall since the data series began.
Against this backdrop, Spanish government bonds outperformed
most of their euro zone peers, pushing their premium over German
Bunds below 200 basis points for the first time since May 2011.
"Today's number ... really highlighted that there is light
at the end of the tunnel," Orlando Green, European fixed income
strategist at Credit Agricole said.
Ten-year Spanish bond yields fell as low as
3.91 percent, pushing the Spanish/German yield spread down to
197 basis points. Yields were last 6 bps lower at 3.93 percent.
"There has been heavy buying," one trader said.
"Unemployment collapsed, so I think that's the trigger."
Equivalent Italian yields fell as low as 3.935
percent, pushing the yield spread over Bunds to just below 200
bps for the first time since July 2011. Italian yields were last
down 1.4 bps at 3.96 percent.
Other lower-rated debt followed suit, with 10-year
Portuguese yields falling 12 bps to 5.76 percent.
Spanish and Italian bonds extended a rally made on Thursday
after stronger than expected manufacturing activity data from
those countries. Analysts expect riskier bonds to continue to
outperform safe-haven ones as the global recovery gathers pace.
Top-rated or so-called "core" bonds have started the year on
a more cautious tone.
Even though the European Central Bank is expected to stick
to a dovish tone, analysts see further room for German yields to
rise as major economies bounce back and as the Federal Reserve
trims its monthly asset purchases.
"We expect euro zone spread convergence as the economic
recovery picks up, the Fed tapers and German bonds
underperform," Lyn Graham-Taylor, fixed income strategist at
German Bund futures were down 3 ticks at 139.09,
with 10-year German yields flat at 1.95 percent,
hovering near their highest since September.
Volumes remained low after the Christmas and new year
holidays with turnover only at around 115,000 lots by 1139 GMT,
a fraction of the 2013 daily average of about 680,000 lots.
"Markets at the moment are repositioning with regards to
better economic conditions and tapering. This is weighing on
German Bunds, but with yields close to 2 percent I think there
is the potential for some relief," Patrick Jacq, Europe rate
strategist at BNP Paribas said. "The conditions are still there
for tighter spreads in the periphery."