EURO GOVT-Bunds fall after cautiously upbeat ECB

LONDON Fri Jan 11, 2013 2:11am EST

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LONDON Jan 11 (Reuters) - German Bund futures fell at the open on Friday, extending the previous day's losses, after the European Central Bank sounded a cautiously optimistic note on the euro zone economy.

Expectations of a strong Italian bond auction later in the day, after Spain made a successful start to its 2013 fund raising programme on Thursday, eroded demand for low-risk Bunds.

Bunds resumed last week's falls after ECB President Mario Draghi said policymakers were unanimous in holding interest rates steady at their meeting on Thursday, cooling expectations of a near-term cut. He also said the economy would recover later in 2013 and there were already some signs of stabilisation.

"Yesterday the market was pricing out any near-term rate cuts and the periphery had a good day so it's all negative for Bunds," a trader said.

At 0703 GMT, the Bund future was 10 ticks lower at 142.60 compared with 142.70 at Thursday's settlement.

"The Italian auction is pretty small so it will go well so presumably Italy and the periphery will remain supported so things might be a bit fragile for Bunds," the trader said.

Italy will sell up to 3.5 billion euros of its 2015 bond and up to 1.5 billion euros of two five-year floating rate CCTeu notes, with borrowing costs for the three-year paper expected to fall below 2 percent to levels last seen in March 2010.

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