EURO GOVT-Bunds dip on cautiously upbeat U.S. data
* German Bunds slide after U.S. Fed minutes judged hawkish
* But jobs data curbs losses
By Emelia Sithole-Matarise and William James
LONDON, Jan 4 (Reuters) - German Bund prices tumbled on Friday, extending the week's steep decline as broadly upbeat U.S. economic data curbed demand for low-risk debt.
Figures showing the U.S. services sector grew in December at its fastest pace in 10 months and doubts about the future of the Federal Reserve's debt purchases added momentum to the sell-off in German bonds that was sparked by U.S. lawmakers' last-gasp deal this week to avert a fiscal crisis.
And while the U.S. jobs report showed the pace of hiring by employers had eased slightly in December, it still gave signs of recovery in the labour market. This has left some investors cautiously optimistic about the world's biggest economy, which could embolden them to buy riskier assets and trim holdings of ultra-low yielding government bonds in coming days.
"Markets are in an optimistic mood after the relief that the fiscal cliff was partially resolved and the ADP (private sector jobs report) and ISM which was stronger than expected," said KBC strategist Piet Lammens.
"Non-farm payrolls were close to expectations and there's some recovery so sentiment remains negative for the Bund market and even though they may pull back we would probably see renewed selling in the coming week."
Bund futures dropped 82 ticks on the day to settle at 142.75, 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 when European markets were shut overnight on Thursday.
SPAIN SUPPLY TEST
Cash German 10-year yields rose 5 basis points to 1.53 percent, their highest in almost six weeks. Lammens and other strategists said although Bunds might recover a bit of ground near-term given the scale of the sell-off this week, the upward trend in yields was likely to remain in place and could take them to April highs of around 1.73-1.75 percent.
"It wouldn't surprise me if Bund yields sold off by another 20 basis points in coming weeks or so. The macro environment has stabilised in the euro zone and has improved in the U.S.," said Padhraic Garvey, head of investment grade debt strategy at ING.
Other 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.
Traders were also looking to a resumption of debt supply from peripheral euro zone issuers next week, with the focus on Spain as it embarks on the most challenging funding programme in the bloc this year.
Spain will sell a new two-year bond alongside reopened 2018 and 2026 lines. Investors still expect Madrid to make a bailout request soon, despite little sign from Prime Minister Mariano Rajoy that he is willing to do so.
Yields on Spanish 10-year bonds were 3 bps up at 5.06 percent with equivalent Italian yields barely changed on the day at 4.27 percent. The rally inspired by greater risk-taking this week is expected to unwind as traders push for lower prices ahead of the fresh supply.
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