EURO GOVT-Bunds rise after hitting support, rebound seen modest

Mon Jan 14, 2013 4:32am EST

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* Rise seen fleeting as technical picture bearish
    * German yields seen creeping higher before Wednesday's sale


    By Ana Nicolaci da Costa
    LONDON, Jan 14 (Reuters) - Bund futures rose on Monday after
testing a key support level on Friday but, given a bearish
technical backdrop, analysts expected only a temporary rebound
before this week's German auction.
    Investors will look to euro zone industrial production data
later in the day for the latest gauge of the region's economic
health, as sluggish data has continued to support demand for
safe-haven debt, despite some signs of stability on the region's
periphery.
    German Bund futures were 43 ticks higher at 142.74,
having fallen to 142.05 - their lowest in six weeks - on Friday.
    "Close to 1.60 (percent) on the 10-year Bund, it may tend to
see firmer demand because the fundamental context hasn't
changed," Patrick Jacq, European rate strategist at BNP Paribas
said, adding the contract was consolidating after a sell-off on
Thursday and Friday.
    "It makes sense to see some limited rebound in the Bund. I
don't think it is the start of a strong rally."
    Technical analysts said the contract was rebounding after
testing key support levels on Friday but that the technical
picture still pointed to further room for declines.
    "We hit a big support on Friday which was a price gap that
we left behind from late October on the March contract as well
as a Fibonacci projection support - that's 142.09-141.95 - so we
think near-term the momentum has turned a little higher," David
Sneddon, technical analyst, at Credit Suisse said. 
    "Our bias though would still be to view strength as
corrective for the time being. We still think the broader risk
is lower still."
    Ten-year German yields were down 3.7 basis
points at 1.56 percent.
    Rainer Guntermann, strategist at Commerzbank, said yields
could edge higher to 1.70 percent by the middle of the week as
investors prepare for an auction of 10-year German bonds.
    Germany sells 5 billion euros of debt maturing on February
2023 on Wednesday - a sale expected to benefit from a recent
rise in yield which makes the returns on the bond more enticing.
An auction of new five-year German bonds last week saw healthy
demand for that reason.  
    "With the 10-year auction coming up out of Germany, there is
a technical argument that yields should jump a bit higher with
the new benchmark," Guntermann said.
    
    PERIPHERY "NORMALIZATION"
    Spanish and Italian government bonds came under some selling
pressure as market participants took profit after strong rallies
on the back of healthy auctions last week.
    Ten-year Spanish government bond yields were
up 9 basis points at 4.98 percent but remained close to a
10-month low hit on Friday.
    Equivalent Italian yields rose 5.8 basis
points to 4.18 percent after falling to their lowest in more
than two years in the previous trading session. 
    The Italian Treasury said on Monday it had mandated five
banks to sell a new 15-year BTP bond and one trader said this
could be adding further supply pressure on lower-rated debt.
 
    Both countries' borrowing costs have dropped markedly since
European Central Bank President Mario Draghi promised to buy
bonds of struggling euro zone sovereigns that ask for help, but
analysts say the "normalization" of those markets was precarious
because it was more based on expectations than fundamentals.
    "What we know in the near term is that we are going to have
an election in Italy in February and we are still waiting for a
Spanish request of some financial support from the euro zone,
(making) Spain eligible for the OMT (Outright Monetary
Transaction)," Jacq said.
    "As long as we don't have the outcome of both events, I
think the potential now for these countries to outperform
further is more limited."
    After a successful start to Spain's hefty 2013 funding
programme, investors will scrutinize an auction on Thursday to
see whether it can maintain the momentum of front-loading
issuance and avoid a sovereign bailout this year.
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