Borrowing costs in the euro area crept up on Thursday but were set to end March with big monthly falls on confidence that the ECB will go slow when winding up stimulus and signs the euro zonne economy is losing momentum. German 10-year bond yields, the benchmark for the bloc, rose above 0.5 percent midway through European trading but ended the session flat at 0.496 percent after German inflation accelerated less than expected.
Overall, yields for the 10-year Bund were down about 16 basis points in March and set for their biggest monthly fall since August. German inflation accelerated more slowly than expected in March, data showed on Thursday, suggesting that price pressures in Europe's largest economy remain fairly moderate despite a broad upswing, rising wages and unprecedented monetary stimulus.
Jobless numbers in Germany also dropped more than expected in March and unemployment hit a record low, adding impetus to a labour market that has already become the linchpin of a consumer-led upswing. French and Italian bond yields were down about 20 bps this month, while Spanish and Portuguese bond yields have fallen more than 30 bps.
A sharp sell-off in technology stocks this week has weighed on world equity markets and further underpinned fixed income. Spanish bonds, meanwhile, gained an additional boost when S&P Global upgraded Spain's credit rating to single-A territory last week, marking a second upgrade this year.
The country's 10-year bond yields were poised for their biggest monthly fall since mid-2016, when borrowing costs across the bloc fell sharply as Britain's decision to leave the European Union stoked fears about the global growth outlook. Spain is one of the best-returning government euro zone bond markets so far this year as the country pushes closer to better-rated euro zone states such as Belgium, France and Ireland, referred to as the "semi-core".
By the end of the European session, Spanish bonds dropped to 1.162 percent, down 5 bps - the lowest level since October 2016. The gap between Spanish and German 10-year bond yields tightened on Thursday to 67 bps - its narrowest in 6-1/2 weeks. "There's a big semi-core convergence trade going on with Spain at the moment," said Rabobank fixed-income strategist Lyn Graham Taylor.
"People like the growth story and are happy to look through the tension with Catalonia," he added, referring to the wealthy region that held an illegal secession referendum last year. Portugal'S 10-year bond yield also outperformed, dropping as low as 1.607 percent, the lowest level since April 2015. After creeping up all day, most better-rated bond yields in the bloc were down by 0.5-1 bps by the end of trading. US personal spending and consumption data, a closely watched gauge of inflation, was also due for release later in the day.
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