EURO GOVT-Upbeat U.S. data hits safe-haven German debt

Thu Jan 3, 2013 11:52am EST

* U.S. private sector adds more jobs than forecast

* Safe-haven bonds extend falls as U.S. payrolls eyed

* Major rise in Bund yields unlikely; U.S. budget talks loom

By Emelia Sithole-Matarise

LONDON, Jan 3 (Reuters) - German Bund yields rose close to a one-month high on Thursday after data showed the U.S. private sector added more jobs than expected in December, cooling demand for low-risk debt.

Yields could rise further if the U.S. non-farm payrolls report due on Friday maintains this week's trend of upbeat economic data. This could trigger an extension of Wednesday's sell-off in safe-haven debt, which came after U.S. lawmakers reached a deal to avert a fiscal crisis.

The ADP Employment Report showed private sector employers added 215,000 jobs in December, well above the 133,000 forecast by economists in a Reuters survey.

German Bunds, which had steadied earlier as investors focused on fresh U.S. budget battles expected in coming weeks, retreated after the figures. Ten-year yields rose 4 basis points on the day to 1.48 percent, their highest since Nov. 2.

"The ADP numbers are quite good though we take them with a pinch of salt due to seasonal effects," said David Keeble, global head of fixed income strategy at Credit Agricole.

"Most of the numbers we've had in New York, whether you look at the ISM (manufacturing report on Wednesday) or the ADP today, seem to be on the firm side so it is justified that we are on the back foot for risk-free assets," he said.

The Bund future dropped half a point on the day to settle at 143.57, bringing its cumulative fall in the past two days to two points.

The renewed sell-off in German debt pushed 10-year Bund yields above the 1.45-1.46 percent area which has held for the past two months, though analysts saw little prospect of a rise much beyond 1.5 percent.

LOOMING BATTLES

Few investors were seen willing to abandon highly liquid and safe-haven debt as U.S. political battles loom in coming weeks over spending cuts and raising the country's debt ceiling.

Republican lawmakers, angry that the deal signed on Wednesday by President Barack Obama to avoid a so-called "fiscal cliff" did little to curb the federal deficit, have said they would use a debate over raising the government borrowing limit to win deep spending cuts.

Failure to raise the borrowing limit could lead to a U.S. debt default.

"I don't think Bunds will sell off too much as there are still some clouds on the horizon regarding the fiscal cliff so it's possible at 1.50 percent prices could bottom out," a trader said.

Analysts said an improvement in the global economic outlook or fresh evidence the euro zone debt crisis can be contained was also needed for Bund yields to move significantly higher.

On the euro zone front, Spain is expected in 2013 to request financial assistance, a move which could activate the European Central Bank's bond-buying programme (OMT) and test its potency as an anti-crisis tool.

"One pre-requisite for Bund yields to start moving up is that we have a further transfer of risk in the euro area. That de facto takes place when a country like Spain seeks help and enables the OMT," Rabobank rate strategist Elwin de Groot said.

In the lower-rated euro zone countries, Italian 10-year yields were 3 bps lower at 4.25 percent while equivalent Spanish yields were 1 basis point lower at 5.04 percent.

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