* Spanish bonds top chart in terms of total returns
* Italy pips last year's best performer Ireland to 2nd place
* More gains seen on accommodative ECB, Japanese buying
By Emelia Sithole-Matarise
LONDON, March 31 Spanish government bonds were
the euro zone's top-performing debt in the first quarter,
handsomely rewarding investors lured by government commitment to
reforms and signs of economic revival as the debt crisis eases.
Running close behind were Italian bonds, pipping last year's
star performer Ireland in terms of total returns. The three bond
markets, hammered during the euro debt crisis, have outperformed
top-rated debt so far this year, attracting investors deterred
by ultra-low yields in major economies.
Spanish bonds have returned 5.75 percent so far
this year, according to data compiled based on Markit's iBoxx
EUR benchmark index, one of the most traded bond indexes by
Italian debt returned 5.20 percent while bonds
issued by Ireland, which became the first of the euro zone's
troubled debtors to exit an international bailout in December,
returned 4.34 percent after topping the returns chart for the
last two years.
Junk-rated Portuguese and Greek bonds handed investors
heftier returns than Spain, Italy and Ireland, as tensions in
emerging markets triggered by the U.S. Federal Reserve trimming
its stimulus scheme pushed some investors back into the
'peripheral' southern European markets they fled in panic three
Portugal and Greece are not part of Markit's iBoxx EUR
benchmark index because their credit ratings are too low.
"The best trades in the first quarter have been to be long
peripherals and long duration. Heading into the second quarter
this should be sustained," said David Schnautz, a strategist at
Commerzbank in New York.
The robust returns from Italian and Spanish bonds look set
to extend into coming months as anticipation the European
Central Bank will take extraordinary stimulus measures to fend
off deflation holds down higher-rated bond yields.
At 0.5 percent in March, euro zone inflation was at its
lowest since 2009, its sixth straight month in the ECB's "danger
zone" below 1 percent.
Talk by some of the ECB's most conservative policymakers
that asset purchases were not out of the question gave fresh
impetus to the rally in euro zone bonds in recent weeks.
"Yields can decline more along the curve. The likes of Spain
and Italy probably have another 25 basis points to go in the
10-year sector. We also remain upbeat further down the credit
curve regarding Portugal," Schnautz said.
Some in the market, such as Citi strategists, expect buying
from Japanese investors to pick up pace as the new financial
year in Japan gets under way. Research by Citi shows Japanese
investors were still short or very short all euro zone
Although Spanish and Italian 10-year yields are now at their
lowest in over eight years at 3.23 percent and
3.28 percent respectively, they still offer a
yield pickup of around 170 bps over German Bunds.
Portuguese yields have also slid to four-year lows to trade
around 4 percent, as investors bet it will end its bailout in
May as smoothly as Ireland.
(Graphics by Vincent Flasseur and Emelia Sithole-Matarise;
Editing by Ruth Pitchford)