* Brighter economic outlook fuels flows into Spain, Italy
* Bund futures rebound after ECB-triggered selloff
* Trade cautious ahead of U.S. jobs data
By Emelia Sithole-Matarise
LONDON, March 7 Spanish and Italian bond yields
fell back to their lowest levels in nearly 8-1/2 years on Friday
after a solid debt sale in Madrid this week as an improved
economic outlook in the euro zone fuelled investor demand.
The market was also stabilising after a sell-off in
top-rated bonds on Thursday on disappointment that the European
Central Bank signalled it was in no hurry to loosen monetary
policy further despite ultra-low inflation.
Although money markets have all but priced out prospects for
further policy easing in coming months, some in the market say
the ECB's pledge to maintain an accommodative policy and that it
might act if economic conditions deteriorated supported demand
for peripheral euro zone debt.
Spanish and Italian 10-year yields fell 4 basis points to
3.39 percent and 3.43 percent
respectively, back at October 2005 lows.
"The Spanish auction yesterday was taken down pretty
comfortably and peripherals in general have performed very well
even with jitters over Ukraine which is a reflection of the
improving sentiment towards the euro area current recovery as a
whole," said RIA Capital Markets strategist Nick Stamenkovic.
"As long as the economic picture in the euro area,
particularly in the periphery, continues to improve and given
that overseas investors are increasing exposure to peripheral
markets there's another leg lower in peripheral spreads."
Spanish 3- and 5-year borrowing costs hit record lows at a
debt auction on Thursday of up to 5 billion euros of bonds,
adding to a string of solid debt sales so far this year.
Commerzbank strategists said they saw scope for further
outperformance in the secondary market for shorter-dated Spanish
and Italian bonds, especially against higher-rated French debt.
"We therefore recommend investors to stick to strategic
longs in 5-year Spain and Italy versus France, expecting another
25 basis point spread convergence over the coming weeks," they
said in a note.
Elsewhere, German Bund futures rose 18 ticks to
142.36, clawing back some ground after suffering their biggest
one-day fall since late December on Thursday after the ECB
refrained from new stimulus measures. Cash 10-year Bund yields
were 1 basis point up at 1.64 percent.
Activity was, however, subdued before U.S. non-farm payrolls
data that will provide insight on the state of the world's
biggest economy and could influence the Federal Reserve's policy