* PMI data shrinks Italian, Spanish spreads to tightest
* Bund yields hit highest since September 2013
* T-note/Bund yield spread may widen further-analyst
By Marius Zaharia
LONDON, Jan 2 The premium Italian and Spanish
bonds offer over benchmark German Bunds fell to its lowest since
mid-2011 on Thursday after manufacturing surveys beat
expectations in both southern euro zone countries.
While overall euro zone Purchasing Managers Index surveys
came in line with forecasts in Reuters polls showing
manufacturing grew at its fastest rate in 2-1/2 years, data on
Italy and Spain surprised on the upside.
The numbers helped drive the yield premium for Spanish
10-year bonds over Bunds 16 basis
points lower to 205 bps. The Italian/German yield spread
shrank 14 bps to 203 bps.
"PMIs in Italy and Spain were better than expected and we
see people switching out of core bonds into peripheral bonds,"
said Rabobank market economist Emile Cardon.
"Investors are asking themselves: why should I invest in
Germany when I get double the yield in Italy or Spain?"
Top-rated bonds started 2014 in the same downbeat mood,
having had a dismal end to last year as the economic outlook
improved and the U.S. Federal Reserve announced it would start
trimming its bond-buying stimulus programme in 2014.
German 10-year Bund yields were last 3 basis
points up on the day at 1.96 percent, having earlier hit their
highest since September at 1.969 percent. Bund futures
fell 23 ticks to 138.94.
"Bunds are under pressure ... on the back of still strong
risk sentiment," Commerzbank strategist Michael Leister said.
"But we think at current levels around 2 percent the
potential for a further rise is rather limited."
Volumes remained low, with about 110,000 lots having traded
in the Bund futures market mid-way through the session, compared
with a 2013 daily average of about 680,000 lots.
Still, stubbornly low inflation in the euro zone and other
major economies as well as promises by the Fed and the European
Central Bank to keep interest rates low for a long period are
expected to cap German and U.S. yields.
Some analysts expect the ECB to ease monetary policy
further, especially if falling excess liquidity levels in the
banking system keeps money market rates elevated.
Eonia, the overnight euro zone bank-to-bank lending rate
ended 2013 at a two-year high of 0.446 percent due to seasonally
thin liquidity. Analysts expected it to fall in coming
days, but the extent of the fall could spark some speculation
about further ECB monetary policy easing.
DZ Bank strategist Christian Lenk does not expect the ECB to
make any move in the near term, but says the central bank will
continue to strike a soft tone, leading to a widening of the
yield gap between Bunds and U.S. Treasuries.
"We can expect a further widening of the transatlantic
spread. The Fed will be less dovish as it starts tapering and
the ECB most likely will remain pretty friendly," he said.
The Bund/T-note yield spread last traded at 107 bps.