By Ana Nicolaci da Costa
LONDON, Jan 3 (Reuters) - The yield premia Italian and Spanish debt offers over German Bunds dipped below 200 basis points fore the first time since mid-2011 on Friday, as the bonds extended a rally triggered by an improved economic outlook.
Ten-year Italian yields fell as low as 3.935 percent, pushing the yield spread over Bunds to just below 200 bps for the first time since July 2011. The yield was last 3.957 percent, down 1.4 bps on the day.
Ten-year Spanish government bond yields fell 6 bps to 3.93 percent, pushing the spread over German Bunds below 200 basis points for the first time since May 2011. It last stood at 199 bps, 5 bps tighter on the day.
The bonds began rallying on Thursday after stronger than expected manufacturing activity data from Italy and Spain.
"Markets at the moment are repositioning with regards to better economic conditions and tapering. This is weighing on German Bunds, but with yields close to 2 percent I think there is the potential for some relief," Patrick Jacq, Europe rate strategist at BNP Paribas said.
"The conditions are still there for tighter spreads in the periphery."
Ten-year German yields were down slightly at 1.94 percent, with German Bund futures up five ticks at 139.17.
"We expect euro zone spread convergence as the economic recovery picks up, the Fed tapers and German bonds underperform," Lyn Graham-Taylor, fixed income strategist at Rabobank, said.