BlueBay, BlackRock see euro area bond rally fading out

By Lucy Meakin and Neal Armstrong

The advance in euro-area government bonds that pushed the 10-year yields of Ireland, Italy and Spain to record lows today is about to end, according to investors from BlueBay Asset Management LLP to BlackRock Inc.

Italian 30-year yields fell below 4 percent for the first time since 2006 as banks from Goldman Sachs Group Inc. to UBS AG predict policy makers will cut borrowing costs next month. European Central Bank President Mario Draghi said yesterday officials are “comfortable” about taking further action if needed. Portugal’s yield spread over German bunds shrank to the narrowest in four years after Standard & Poor’s raised the nation’s credit-rating outlook to stable from negative.

“Markets have clearly moved to expect a rate cut as a minimum at the June meeting,” said Mark Dowding, a money manager in London at BlueBay, which oversees $57.8 billion. “The burden of proof is in the data and Draghi may find it difficult to deliver in June. The market is getting ahead of itself. The sense in the periphery is that we’ve now seen the vast majority of the spread tightening that we’re looking for.”

Spain’s 10-year yield climbed three basis points, or 0.03 percentage point, to 2.92 percent at 4:51 p.m. London time after sliding to 2.85 percent, the lowest since Bloomberg began compiling the data in 1993. The 3.8 percent bond due in April 2024 fell 0.29, or 2.90 euros per 1,000-euro ($1,377) face amount, to 107.545.

Italy’s 10-year yield increased four basis points to 2.95 percent after declining to 2.89 percent. The rate on the nation’s 30-year bonds dropped to 3.985 percent, the least since January 2006.

Staff Projections

“The Governing Council is comfortable with...