EURO GOVT-Bunds fall after U.S. Fed dampens stimulus expectation

Fri Jan 4, 2013 4:11am EST

Related Topics

* German Bunds slide after U.S. Fed minutes judged hawkish

* May rebound if U.S. data dashes high expectations

* Scope for fresh falls seen limited by euro zone concerns

By William James

LONDON, Jan 4 (Reuters) - German Bund futures dipped on Friday, extending the week's steep decline after signs that the U.S. Federal Reserve may be less committed to its bond-buying stimulus plans than previously thought.

With U.S. markets continuing to drive global investor sentiment, minutes from the Fed's latest meeting gave fresh momentum to the sell-off in low-risk government bonds that was sparked by U.S. policymakers' last-gasp deal to avoid recession-inducing spending cuts and tax hikes.

Some Fed members showed growing concern about expanding the central bank's asset purchase programme which created doubt that ultra low yields on core government bonds, including German debt, could be sustained.

"There's disappointment at the Fed minutes, that's the main story... presumably they're hoping things in the economy pick up in the second half of the year and so they don't have to do more QE (quantitative easing)," a trader said.

Bund futures fell 50 ticks to 143.07, extending the sell-off seen over the course of the last three sessions in which Bunds have dropped more than two full points. U.S. Treasuries also fell, adding to moves after Thursday's European settlement.

The Fed minutes ramped up the focus on today's U.S. non-farm payrolls report, which may prove the trigger for further losses if it shows the economy added more jobs than the more than the 150,000 forecast by a Reuters poll.

"The Fed has made it clear that it will keep policy loose until unemployment drops to 6.5 percent or below, so strong jobs data will undoubtedly raise expectations of a more hawkish Fed," analysts at Tradition brokerage said in a note.

However, after a better-than-expected ADP employment report on Thursday, many were already betting on an above-consensus payrolls report - bets which could see markets turn around sharply if the number fell short of expectations.

"Clearly after yesterday's ADP report the market has positioned for a strong non-farm payrolls, so now the risk is of a disappointment," said BNP Paribas strategist Patrick Jacq.

Anything below a 100,000 jobs gain would significantly disappoint speculative traders, although the lasting impact on Bund prices was likely to be limited, Jacq said.

Many market participants remained sceptical that the sell-off in German debt will continue to worsen, arguing that the euro zone's domestic debt and low growth problems are far from solved and the U.S. fiscal deal is merely a short term fix.

"I don't think the data in Europe has been particularly good, we will take our lead from the U.S. but you'd have thought Bunds should outperform (Treasuries)," the trader said.

Yields on Spanish and Italian bonds were barely changed on the day and the rally inspired by greater risk-taking this week was expected to unwind once both countries begin their 2013 fundraising challenges next week.

Spain's sale of a new two-year bond will be in particular focus next week with investors still expecting Madrid to make a bailout request soon, despite little signs of willingness from Prime Minister Mariano Rajoy.

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