EURO GOVT-Bunds tumble after U.S. Fed, anticipating strong data

Fri Jan 4, 2013 7:41am EST

Related Topics

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

* Anticipation of strong payrolls report exacerbates selloff

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

By William James

LONDON, Jan 4 (Reuters) - German Bund prices fell on Friday, extending the week's steep decline as doubts about the future of the U.S. Federal Reserve's stimulus programme and expectations of strong economic data curbed demand for low-risk bonds.

Minutes from the Fed's latest meeting added momentum to a sell-off in German 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.

With U.S. developments at the forefront of investors' minds, growing anticipation of an above-consensus non-farm payrolls report later in the day saw some traders sell Bunds in anticipation of profiting from a further fall after the data.

"It's a thin market which is exacerbating the move, but really this is catch up with the U.S. after yesterday's (Fed meeting)... people are also positioning for a pretty strong payrolls number now. It's hard to stand in the way of Bunds at the moment," a trader said.

Bund futures fell 91 ticks to a one-month low of 142.66, extending the sell-off seen over the last three sessions in which Bunds have dropped nearly three full points.

The move was greater than that in U.S. debt, where futures were down less than half a point, bringing markets into line after Treasuries sold off when European markets were shut on Thursday.

PAYROLLS FOCUS

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 swiftly see bunds recover losses 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.

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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