EURO GOVT-Euro zone output data reinforces Bund's rebound, but rise seen fleeting
* Bunds rise after hitting support on Friday * Rise seen fleeting as technical picture bearish * German yields seen creeping higher before Wednesday's sale * Euro zone data reinforces correction of recent trend By Ana Nicolaci da Costa LONDON, Jan 14 (Reuters) - Bund futures rose on Monday after the contract tested key support on Friday but, given a bearish technical backdrop, analysts expected only a temporary rebound before this week's German auction. An unexpected fall in euro zone factory output gave investors further reason to buy into safe-haven German debt which has seen a yield pick-up since the start of 2013, and to take profit on last week's rally in Spanish and Italian bonds. "Since the beginning of the year, we had a significant sell-off (in Bund futures) and there was a bit of a retracement of that and it was compounded by the industrial production numbers being weaker than expected," Ricardo Barbieri, strategist at Mizuho said. Industrial production in the region sharing the euro fell 0.3 percent in November from the previous month, against a forecast for a 0.1 percent rise - in the latest sign of the euro zone's economic challenges. German Bund futures were 47 ticks higher at 142.79, having fallen to 142.05 - their lowest in six weeks - on Friday. Ten-year German yields were 4.2 basis points lower at 1.55 percent but could rise to 1.7 percent by the middle of the week as investors prepare for an auction of 10-year German paper, Rainer Guntermann, strategist at Commerzbank, said. Germany sells 5 billion euros of debt maturing in February 2023 on Wednesday - a sale expected to benefit from the 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 added. 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." 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 bps at 4.98 percent and the Italian equivalent rose 4 bps to 4.16 percent after falling to their lowest in more than two years in the previous trading session. Italy will attempt to sell 15-year debt this week for the first time in more than two year, according to the Treasury, and one trader said this would 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 based more 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)," Patrick Jacq, European rate strategist at BNP Paribas 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 Madrid can maintain the momentum of front-loading issuance and avoid a sovereign bailout this year.
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