EURO GOVT-Spanish aid limbo keeps Bunds range-bound

Wed Oct 3, 2012 7:30am EDT

Related Topics

* Bunds higher on Rajoy but seen range-bound

* China, German data fuel concerns about global growth

* Traders reluctant to sell Spain

By Ana Nicolaci da Costa

LONDON, Oct 3 (Reuters) - German Bund futures firmed on Wednesday after Spain's prime minister cast new doubt on the timing of any bailout request and as new data underlined weakness in the Chinese and German economies.

But gains were limited with investors reluctant to take big bets before key events later this week. Traders also refrained from selling Spanish and Italian bonds, with markets widely expecting Madrid to seek financial help which would likely trigger the European Central Bank's bond-buying programme.

"We had some comments from the PM that a bailout wasn't imminent ... A lot of the improvement we had seen in Spanish bonds yesterday was driven by overnight speculation that a bailout was imminent so any rebuttal of that had an impact," Brian Barry, fixed income analyst at Investec, said.

German Bund futures rose 13 ticks to 141.55, pushing 10-year yields 1 basis point lower to 1.45 percent.

But 10-year Spanish government bond yields were also down 1.3 basis points on the day at 5.75 percent and the Italian equivalent shed 3.4 basis points to 4.99 percent.

"We started with a bit of a high on the Bund but it was not much surprise on the back of the comments we had last night from Rajoy. Then we came down, we didn't break technical levels and in any case Spain and Italy look very well bid," one trader said.

"There is a lot of speculation that (Madrid) will go soon for the package, so people are not in a hurry to sell at the moment."

Michael Leister, senior interest rate strategist at Commerzbank, said the market could take Spanish 10-year yields back to 6 percent as it tries to pressure Madrid into seeking financial help but would be reluctant to push them to 6.5 or 7 percent for fear of being caught off-guard by the ECB.

Elsewhere in peripheral markets, Portuguese 10-year yields fell as the country made its first venture into bond markets since it sought a bailout last year, to swap short-dated bonds for longer maturities.

NAGGING GROWTH

Dwindling new orders and faster layoffs marked a worsening decline for euro zone companies last month, according to business surveys that dent hopes the economy will return to growth before 2013.

Germany's services sector contracted unexpectedly in September and China's normally robust equivalent weakened sharply to its lowest point since November 2010. ID:nL3E8L30KQ]

Investors will now look to U.S. data, starting with the ADP employment report later on Wednesday, watched as a guide to Friday's non-farm payrolls employment number, which is expected to show that employers added 113,000 jobs in September.

More signs of economic weakness could give the December Bund contract further support and technical analysts were flagging Friday's high of 141.95 as the next key level on the upside.

"We are in consolidation mode within this current uptrend and that trend finds support at 141.12 ... whilst above that, the bias is for a break through the September high of 141.95 to test the August (contract) high of 142.62," technical analysts at Credit Suisse said.

Leister expected 10-year yields to be in a 1.40 to 1.80 percent range into the end of the year.

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