EURO GOVT-U.S. jobs data hurt Bunds, Spain rallies within ranges

Fri Oct 5, 2012 12:28pm EDT

* Bunds fall as U.S. jobless rate unexpectedly falls
    * Spanish bonds rally but remain range-bound
    * Uncertainty over timing of Spanish aid remains
    * Analysts say hard to short Spanish and Italian markets


    By Ana Nicolaci da Costa and William James
    LONDON, Oct 5 (Reuters) - German bond prices fell sharply on
Friday after a surprise drop in U.S. unemployment underpinned
appetite for riskier assets, reinforcing a rally in debt issued
by lower-rated euro zone sovereigns including Spain.
    Spanish bonds rallied on expectations the euro zone's fourth
largest economy will eventually benefit from central bank
intervention. 
    But bond yields remained in recent ranges as questions
persisted on when Spain might make a request for a bailout,
which is a precondition of any European Central Bank
bond-buying.
    The U.S. Labor Department said unemployment fell to 7.8
percent in September from 8.1 percent in August, compared with
economists' expectations of a rise to 8.2 percent, sending U.S.
Treasury prices lower.  
    "It's more risk-on than anything else, because as
unemployment rates are going to fall it makes the U.S. economy
do a little bit better. That's going to have a knee-jerk
reaction in these higher risk sectors such as peripherals," one
trader said.
    German Bund futures fell 80 ticks to 141.67 as the
debt issued by lower-rated countries rallied.
    Borrowing costs over two years for Spain fell 23 basis
points to 3.15 percent, while the 10-year equivalent shed 22
basis points to 5.71 percent. 
    Some analysts said a Reuters report detailing the scope of
potential ECB intervention underpinned the move higher.
    The ECB envisions buying large volumes of sovereign bonds
for a period of one to two months once its programme of
"Outright Monetary Transactions" is launched, but would then
suspend purchases during an assessment period, senior central
bank sources told Reuters. 
    "You get the sense that if it ever occurs it's going to be a
big programme," said David Keeble, global head of fixed income
strategy at Credit Agricole, adding that the market was getting
to yield levels where momentum would be self-fulfilling.
    "You have got an enormous amount of carry by buying a
Spanish or Italian bond still. It is very difficult to go short
if you are a balanced portfolio manager because every time you
go short in this market you are really possibly locking in a big
loss."
    Italian 10-year bond yields were 7.7 bps lower
at 5.06 percent.
    
    PORTUGAL
    Among the region's other higher-yielding bonds, debt issued
by Portugal rallied sharply on the day. Ten-year yields
 fell to a three-week low of 8.24 percent, and
stood down 46 bps at 8.25 percent in late trading.
    "There's not much flow behind it, but some people are
betting that things are going to get a bit better for them after
the bond swap and, who knows, maybe the ECB is even going to
intervene there at some point. But it's all speculation at this
point," one trader said.
    Earlier this week, Portugal carried out a swap to exchange
bonds maturing next year for longer-dated debt, in what the
country's debt agency head described as a first step towards
regaining market access. 
    Morgan Stanley recommended buying long-dated Portuguese
bonds as the country edges back toward issuing debt.
    However, ECB President Mario Draghi said on Thursday the
central bank will not by the bonds of already bailed-out
countries such as Portugal under its new crisis plan because
they do not have full access to bond markets. 
    Over the medium term, analysts said price developments still
hinged on how quickly Spain decides to ask for financial help to
get ECB support.
    Next week's meeting of euro zone finance ministers had
previously been flagged as an opportunity for Spain to make an
aid request, but expectations have been pared back and the event
may even result in further pressure on Spanish debt.
    "For sure everyone will keep an eye on the meeting but I
don't think there's expectations of a firm decision. It could
even expose more the differences in opinion," said Elwin de
Groot, senior market economist at Rabobank.
    "Very short term, this could inject even more uncertainty
and therefore a more negative sentiment in the market."
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