EURO GOVT-Bund selling pressure meets technical barrier

Tue Jan 29, 2013 7:21am 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) - German Bund prices rose on Tuesday, with investors waiting for more evidence that the global economy is recovering before deciding whether to sell the euro zone benchmark debt.

This year's sell-off in Bunds, as newly confident investors pushed riskier assets such as stocks sharply higher, has driven prices down to important levels on technical charts which sellers were unwilling to break through, traders said.

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.

Markets interpreted that above-forecast number as a sign euro zone banks were growing stronger and becoming less reliant on ECB support.

Some analysts had suggested banks would replace long-term ECB loans with shorter-term ones but these concerns were contained as the ECB said banks took 124 billion euros in one-week loans on Tuesday, roughly 1 billion less than last week.

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

"We've bounced off some technical levels around recent lows (in price) as some people are taking profits, a few are putting new longs ahead of this week's data," one trader said.

"But from the way the market sold off recently you'd still think bears are in control and, for choice, most people will be looking to sell into strength," he added, referring to investors that had a negative view on Bunds.

Ten-year German yields were last 3.5 basis points lower on the day at 1.661 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, their highest in the second half of 2012.

"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.

FOCUS ON DATA

Bund futures were 33 ticks higher on the day at 142.12. They hit a two-month low of 141.61 on Monday, having fallen by almost two full points in the past three sessions.

A second trader said that if they fell through Monday's lows, their next target would be late October troughs around 140.85. UBS technical strategist Richard Adcock recommended investors sell the Bund future, targeting 140.15, just above mid-September lows.

"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," the second 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."

He said Wednesday's euro zone economic sentiment data and the U.S. non-farm payrolls report on Friday would be key for investors to decide whether to start selling Bunds again. "I'd like to see stronger data going forward to vindicate these moves (the recent sell-off)."

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 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," Rabobank's de Groot said.

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