LONDON May 22 Yields on the euro zone's
lower-rated bonds fell on Thursday after data showed French
business activity unexpectedly contracted in May, strengthening
the case for more monetary policy easing by the European Central
Markit's purchasing managers' index for France, covering the
manufacturing and services sectors, fell in May to 49.3 from
April's 50.6, sinking below the line dividing contraction in
activity from expansion.
Germany's PMI met expectations, showing the private sector
The poor French data reminded investors that the ECB has
flagged possible monetary easing actions in June and that it
could even start printing money at some point to fight low
inflation and boost growth.
The numbers allowed peripheral bond yields to reverse the
rise that followed chunky debt sales in Spain and Italy last
week and was exacerbated by nervousness about the outcome of
European Parliament elections.
"The outlook for monetary policy in Europe is a factor
providing a floor for (peripheral) markets," said Elwin de
Groot, senior market economist at Rabobank.
Spanish 10-year yields were 5 basis points
lower at 2.97 percent, still about 15 bps above record lows hit
last week. Italian yields fell 4 bps to 3.17
Spain plans to issue up to 3.5 billion euros in five- and
10-year bonds later in the day. The amount on offer is smaller
than usual, and a back-up in yields from last week's lows should
lure in some buyers, ensuring the sale goes well.
But the sale comes on the heels of heavy primary market
activity in peripheral markets.
Last week, Spain sold 5 billion euros of inflation-linked
bonds and Italy sold 14.25 billion of debt, with some traders
saying they felt overloaded with peripheral bonds.
"Today's auctions will ... serve as a good indication of
whether last week's periphery supply headache has cleared,"
Peter Chatwell, rate strategist at Credit Agricole, said in a
Worries the outcome of this week's European parliament
elections might destabilise some of the euro zone governments or
sway them to delay any painful economic reforms were among the
factors behind the recent rise in peripheral yields.
In Greece, a strong showing by anti-bailout parties could
hurt the already fragile coalition, potentially paving the way
to national elections. In Italy, a weak result for Prime
Minister Matteo Renzi's party might weaken his drive for the
swift reforms he promised when he took power in a party coup.
BNP Paribas rate strategist Patrick Jacq said the selling
pressure was always going to be temporary as long-term investors
had not participated.
"Almost no real money account was involved in this selloff
in Europe," he said.
The political uncertainty may still make rating agencies
cautious when they decide on Friday on the ratings of Greece,
Portugal, Spain, France, the Netherlands and the UK.
"The political situation - you have to take that into
account as a ratings agency," said de Groot at Rabobank. "It is
better to wait for the outcome of EU elections and see if
stability is maintained."
(Editing by Nigel Stephenson)