* Italian, Spanish 5-yr yields at lowest in at least 20
* Euro zone factory recovery strongest in 2-1/2 years
* German 5-year bond sale draws lacklustre demand
By Emelia Sithole-Matarise
LONDON, March 5 Spanish and Italian five-year
yields hit fresh historical lows on Wednesday after surveys
showed robust growth in the euro zone's service industry, adding
to signs the bloc's southern economies are strengthening.
Euro zone private businesses enjoyed their fastest growth
rate in over 2-1/2 years last month, as the bloc's services
sector expanded faster than initially thought.
The Markit composite purchasing managers' indexes for Italy
and Spain, the euro zone's third and fourth biggest economies,
both beat forecasts and came in above the 50 mark that separates
growth from contraction.
Germany again led the upturn in the 18-member bloc's
fortunes, but the services PMI for France, the region's no.2
economy, slipped to 47.9, further below the breakeven mark where
it has languished for most of the last two years.
The readings strengthened investors' view that the economic
recoveries in Spain and Italy, crucial to curb high debt levels,
are gaining ground.
Spanish five-year yields were down 4 basis points
at 1.90 percent, falling further below 2 percent to their lowest
in at least 20 years, according to Reuters data. Italian
equivalents were also lower by a similar amount at 1.93 percent.
Yields on both countries' 10-year bonds dipped further to
new eight-year lows. Italy's 10-year debt was yielding 3.38
percent and 3.39 percent
respectively, their lowest since late 2005.
Improved outlooks on the two countries' creditworthiness and
easing investor worries about the euro zone debt crisis have
also sharpened investors' appetite for their government bonds,
driving borrowing costs to multi-year lows.
"This (PMI data) is simply confirmation of the trend that we
see a substantial rebound in the periphery and prompts investors
to add positions in a segment of the European government bonds
where you still get a decent amount of yield," said Christian
Lenk, a strategist at DZ Bank.
Although Italian and Spanish bonds have rallied sharply so
far this year, they still offer higher potential returns than
top-rated German bonds where yields are a fraction of peripheral
euro zone yields.
Recent strains in emerging markets (EM) have also fed the
bond rally, underpinned by signs of recovery in the euro zone
and the European Central Bank's pledge to buy government bonds,
under strict conditions, if a country gets into trouble.
"We continue to see scope for it (EM crisis) proving
positive for peripherals as investors wanting to shift out of EM
look for 'relative' safety while giving up as little yield as
possible," Rabobank strategist Richard McGuire said.
LACKLUSTRE GERMAN DEBT SALE
German 10-year Bund yields, the benchmark for euro zone
borrowing costs, were up 2 bps at 1.62 percent following the
PMIs. Improved risk-taking ahead of talks between the United
States and Russia on easing tensions over Ukraine also sapped
demand at an auction of German debt.
Berlin sold 3.27 billion euros of five-year bonds, drawing
bids worth 1.4 times the amount offered versus 1.7 at last
month's sale. It was, however, better than last week's 30-year
bond auction which was shunned by investors due to its low
potential returns, and a 10-year debt sale the week before which
met similarly poor appetite.
Five-year German yields were up 1 basis point at 0.64
percent in the secondary market with further rises tempered by
caution ahead of the ECB's policy meeting on Thursday.
Money markets show little likelihood of further monetary
policy easing from the ECB this week after slightly
forecast-beating inflation data last week. Many still expect the
ECB to act later this year as inflation is predicted to stay way
below the central bank's target of below but close to 2 percent,
potentially threatening the euro zone recovery.