EURO GOVT-Bund sell-off pauses at technical barrier

Tue Jan 29, 2013 4:21am EST

Related Topics

* Ten-year Bund yields meet technical resistance

* Fresh strong data needed for sell-off to resume

* Spanish, Italian yields slightly higher

By Marius Zaharia

LONDON, Jan 29 (Reuters) - Bunds edged up on Tuesday, with investors waiting for more evidence that the global economy is recovering before deciding whether to sell German debt through key technical levels.

Monday's better-than-expected U.S. durable goods data added momentum to a recent sell-off in Bunds triggered by the European Central Bank's announcement last week that banks planned to repay 137 billion euros of three-year loans taken in late 2011.

Analysts did not expect a reversal in the selling pressure Bunds have felt since the start of the year, but said yield levels were approaching key technical resistance which warranted a pause for breath.

"Ten-year yields are pretty close to the September highs from last year so we're getting into a territory where perhaps it's time for a pause and a reality check," Rabobank market economist Elwin de Groot said.

Ten-year German yields were last 1.6 basis points lower on the day at 1.68 percent, according to Reuters data, just off Monday's 4-1/2 month highs of 1.712 percent and almost 40 bps higher since the end of last year.

Last September, they rose as high as 1.737 percent, the highest level seen in the second half of 2012.

Last week's ECB data was taken as a sign the banking system was recovering, sparking selling pressure in Bunds led by the shorter-dated maturities. A raft of upbeat data in the United States this year has also contributed to weakness in Bunds, prompting some market participants to expect a more lasting sell-off near-term.

"We're in a scenario in which we have a bit of a sell-off, then technicals kick in and it all becomes a bit self-fulfilling," one trader said.

"Trying to buy feels like catching a falling knife. You need a strong reason to buy and I don't think we've seen one apart from just some views that it (the sell-off) has gone too far."

FOCUS ON DATA

Bund futures were 8 ticks higher on the day at 141.87. They hit a two-month low of 141.61 on Monday, having fallen by almost two full points in the past three sessions.

The trader said that if Bund futures fell through last session's lows, their next target would be late October lows around 140.85.

"Yesterday was a pretty messy day so we may have a few people looking to oppose this move," he said. "I'd like to see stronger data going forward to vindicate these moves."

Investors will pay particular attention to Wednesday's economic sentiment data out of the euro zone and U.S. non-farm payrolls data on Friday.

Italian and Spanish bonds, which have rallied strongly this year, were weaker on Tuesday. Spanish 10-year yields were 4.4 bps higher on the day at 5.27 percent.

On Monday, the European Union's economic and monetary affairs commissioner, Olli Rehn, said Spain's fiscal targets could yet be relaxed again if the economy was found to have seriously deteriorated. Spain has already been given an extra year, until 2014, to meet its deficit target.

"I'm not saying this is what is moving the markets today, but it underlines the tough climate Spain is facing ... and shows how long is the road to budget consolidation in these countries," de Groot said.

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