EURO GOVT-Bunds hit three-week high after weak French data

Thu Jan 24, 2013 4:30am EST

Related Topics

* Weak French PMI data sends Bunds to a three-week high

* Rise limited as euro zone decline slows, led by Germany

* Overall growth fragile, may return to hurt periphery

By William James

LONDON, Jan 24 (Reuters) - German bond prices rose to a three-week high on Thursday after French business activity data fell short of expectations and pointed to a recession in the euro zone's second biggest economy.

Above-forecast German data stemmed the rise in demand for low-risk assets, but the discrepancy will flag concerns that the euro zone's recovery is vulnerable if only Germany can generate growth. Those concerns were supported by Spanish figures showing another record high unemployment rate.

The Bund future rose 25 ticks to 143.84, reversing an early fall and smashing through the upper limit of a range that had survived several tests since early January.

"It was only the French data that was weaker but we triggered some stops on the way up and that's exaggerated the move a bit," a trader said, citing automated buying around recent highs of 143.64/67.

Technical analysts said a break out of this range could propel the Bund higher if sustained into the close, with UBS analyst Richard Adcock highlighting a move to 144.38 - the 62 percent retracement of the December to January sell-off.

The market's initial positioning for data showing an improvement in the euro zone had also meant the focus on the French weakness was greater, analysts said.

DIVERGENCE FROM FUNDAMENTALS

A string of heavily oversubscribed debt sales by peripheral states over the last two weeks has reinforced confidence that funding problems for the region weaker states have eased.

However, some market participants remain sceptical that the demand is based on improving fundamentals, instead highlighting the huge amount of cash made available by loose central bank policy that needs to be put to work to generate returns.

"Historically, Bunds tend to get a kicking in the first quarter as new money helps (weaker credits) outperform. After February-March the real numbers start to kick in," the trader said.

Although the rate of decline in the euro zone private sector slowed by more than expected, the growth that the region's weaker economies like Spain and Italy need to turn around their finances and start reducing debt remains some way off.

Nevertheless, Spanish 10-year bond yields were 6 basis points lower on the day at 5.02 percent, quickly shrugging off an early rise on the back of the record unemployment rate.

Investec analyst Elisabeth Afseth said that over the longer term it would be hard to reconcile the enthusiasm for lower-rated debt issued by peripheral states with the weak growth picture.

"My concern is that there will be tensions further down the line because of this," she said.

"Nobody is expecting to see this growth immediately, but having said that, the continuing disappointing economic figures aren't doing anyone any good."

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