EURO GOVT-Month-end buying lifts German Bunds after Fed

Thu Jan 31, 2013 7:16am EST

Related Topics

* Month-end buying by index-trackers supports Bunds

* German debt up after Fed says maintains stimulus stance

* Political set-back weighs on Spanish debt

By Marius Zaharia and Ana Nicolaci da Costa

LONDON, Jan 31 (Reuters) - German Bund futures rose on Thursday, benefiting from month-end buying and after the Federal Reserve left in place its $85 billion per month bond-buying programme and said U.S. growth had paused.

The move mirrored U.S. Treasuries, which rose after the Fed pledged to keep the stimulus in place to bring unemployment down.

Month-end buying by investors adjusting their portfolios to match the bond index they track also helped push German debt higher after five consecutive sessions of falling prices.

"There is a big month-end extension by indexed accounts," said one trader, adding that Bunds had been the biggest beneficiaries of that. "When this month-end is over, it's probably going to be a sell again."

Bund futures were last 65 ticks higher at 142.08, having fallen by more than two points in the past five sessions.

Data on Wednesday showed the U.S. economy unexpectedly contracted in the fourth quarter, but analysts expected the decline to be temporary given that consumer spending and business investment picked up.

Traders said above-forecast economic data earlier this year had raised expectations of improving U.S. growth rates, and many in the market were still betting the Fed might turn reluctant to maintain its stimulus programme later this year.

That should keep investors inclined to keep selling Bunds, which are down 2.5 percent so far this year.

For the latest gauge on the health of the U.S. economy, investors would keep a close eye on payrolls data due to be released on Friday.

This week, larger-than-expected repayments by euro zone banks of three-year loans to the European Central Bank have weighed on German debt.

"We keep trying to recover and we keep being knocked back," a second trader said. "It feels like a bear market and people are looking for reasons to sell into strength."

Commerzbank strategists recommended investors buy Bunds, anticipating support from month-end flows.

PERIPHERY UNDER PRESSURE

Traders said hedge funds were selling Italian and Spanish debt to buy Bunds after the Fed meeting, and that pushed yields higher in the two countries.

Italian 10-year bond yields were 5.5 basis points higher on the day at 4.34 percent, while the Spanish equivalent rose 6 bps to 5.27 percent, with political tensions weighing on prices.

Spain's Prime Minister Mariano Rajoy and its ruling People's Party denied on Thursday that the party made payments from business donors to the premier and other party leaders after a newspaper published what it said were secret party accounts.

The allegations carried extra weight against the backdrop of a widening corruption scandal over alleged secret cash payments to PP leaders that has hit Rajoy's popularity.

"That's weighing on the peripherals and giving Bunds a bit of a bid," Peter Schaffrik, head of European rates strategy at RBC Capital Markets said.

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