July 1, 2014 / 7:30 AM / in 3 years

Italy, Spain yields slip before euro zone manufacturing activity data

LONDON, July 1 (Reuters) - Italian and Spanish bond yields dipped on Tuesday before euro zone manufacturing activity data expected to confirm the bloc’s feeble economic growth, underlining the European Central Bank’s ultra-easy monetary policy.

Weak inflation numbers on Monday only served to reinforce the ECB’s unprecedented policy measures last month, though the fact it did not deteriorate from May’s 0.5 percent reading gave the bank room to hold off on further steps at this week’s meeting.

Flash Markit manufacturing surveys just over a week ago showed the euro zone’s private sector expansion unexpectedly slowed last month. The region’s biggest economy, Germany, expanded robustly, although a little more slowly while France’s private sector shrank at the fastest rate in four months.

“The ECB will certainly take this data into account and EMU inflation remains at a very low level and this rather supports the dovish tone of the ECB in general but not changing their view for now,” said Christian Lenk, a strategist at DZ Bank.

“This should keep yields subdued but we don’t expect much of a move before Thursday’s ECB meeting and also the (U.S.) non-farm payrolls,”

Italian 10-year yields were last about 1 basis point lower at 3.67 percent with Spanish equivalents down a similar amount at 2.66 percent.

Yields on Portuguese bonds nudged higher, slightly extending Monday’s rise on uncertainty about the country’s biggest bank after Luxembourg’s justice authorities launched a probe into three of its holding companies. The yields were last at 3.69 percent, having bounced off 2005 lows around 2.25 percent hit three weeks ago.

Bond traders said the uncertainty over Banco Espirito Santo, which were down 6 percent after Monday’s 10 percent slide, were prompting some investors to book profits in Portuguese government bonds after their recent sharp rally.

“The investigation in Luxembourg is dragging a little bit on PGBs and some invesots have tatken this an opportunity to take profits,” one trader said. (editing by Ralph Boulton)

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