* Spanish yields at lowest since 2005
* Bund yields dip on Ukraine turmoil
* Ukraine tension offsets strong U.S. jobs data
(Updates with U.S. jobs data, fresh comments)
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, May 2 Spanish yields dipped below 3
percent for the first time in nine years on Friday as
lower-rated euro zone bonds shrugged off turmoil in Ukraine to
continue their ECB-driven rally.
Peripheral euro zone bonds outperformed higher-ranked peers,
which were caught in choppy trade. Yields on higher-rated bonds
rose after strong U.S. jobs data, then retreated on growing
tension between Russia and Ukraine.
Pro-Russian rebels shot down two Ukrainian helicopters in
the south-eastern town of Slaviansk on Friday as Russia
reportedly called for a meeting of the United Nations Security
Council over the Ukrainian army operation in the town.
Unlike the debt crisis of 2011-12, unrest in Ukraine has
failed to rattle peripheral markets. They have gained support
from the possibility the European Central Bank will tackle low
inflation by buying government debt - in effect, printing money.
Inflation was 0.7 percent in April, below forecasts and well
below the ECB target of less than but below 2 percent.
"Most gobal bond investors have been, rightly or wrongly,
very underweight peripheral bonds ... And so the process we're
experiencing now is a neutralising of a lot of those underweight
positions," said Rabbani Wahhab, senior fixed income portfolio
manager at London and Capital.
"I don't think there's too much left in this spread
tightening against (German) Bunds, but we are very aware this
might last for just a little while longer but then it's coming
towards the end."
Spanish 10-year yields fell 6 basis points to
2.97 percent, the lowest since 2005. A breach below 2.97 percent
would take them to record lows, according to Reuters data.
UKRAINE TURMOIL LIFTS BUNDS
Equivalent Irish and Italian yields were around 4 bps lower
on the day. Portuguese yields slipped 2 bps to
3.62 percent before a government meeting this weekend to decide
whether to exit its bailout without a precautionary loan
programme in place.
Earlier on Friday, Portugal passed a final review by its EU
and IMF lenders, paving the way for a smooth exit on May 17 from
the 78 billion-euro bailout begun in 2011.
"Investors are still looking for yield," said Felix
Herrmann, a market strategist at DZ Bank. "We think there is
still room for spreads to tighten.
"Peripheral bonds are definitely back on their way to
becoming a duration product again," he said, referring to
traditional fixed-income instruments that are seen as a safer
alternative to equities.
German 10-year yields, the benchmark for euro
zone borrowing costs, dipped 2 bps to 1.45 percent in late
trading as tension between Ukraine and Russia grew.
The geopolitical strains reversed an initial rise in the
yields to 1.51 percent after a surge in U.S. non-farm payrolls
in April bolstered optimism about the U.S. economy and suggested
a possible rebound in second-quarter economic activity.
"Presumably, the market got itself short after the U.S.
numbers so there's a bit of a flight-to-quality squeeze into the
weekend," one trader said.
Traders said the prospect of a long weekend in London, with
a bank holiday on Monday, made investors extra cautious, despite
Bunds looking "very expensive".
(Editing by Larry King)