EURO GOVT-Bunds suffer worst month since June
* Month-end buying by index-trackers supports Bunds
* Trading choppy as U.S. data paints mixed picture
* Italian debt rally takes a breather
By Ana Nicolaci da Costa and Marius Zaharia
LONDON, Jan 31 (Reuters) - Month-end buying buoyed German debt on Thursday, but the Bund contract still posted its biggest monthly loss - 2.6 percent - since June last year.
Investors adjusted their portfolios to match the bond indexes they track but traders bet the recent downside would resume, expecting new-found stability in the euro zone debt market to continue to fuel a hunt for yield.
"It is clearly a volatile session in Bunds. Today is the last day of January, (we are seeing) month-end extension trades which obviously support especially the long-end," David Schnautz, interest rate strategist at Commerzbank said.
Bund futures were 46 ticks higher at 141.80, having fallen by more than two points in the past five sessions.
Trade this session was choppy, mirroring price swings in safe-haven counterparts U.S. Treasuries, as recent data painted a mixed picture of the world's largest economy.
After the Federal Reserve on Wednesday left in place its $85 billion per month bond-buying programme and said U.S. growth had paused, investors will look to upcoming jobs data on Friday to gauge the monetary outlook going forward.
Releases this week showed the U.S. economy unexpectedly contracted in the fourth quarter but the pace of business activity in the U.S. Midwest picked up in January.
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 also keep investors inclined to keep selling Bunds. Overall, traders expected the Bund sell-off to resume, which for some, was a sign of things to come this year.
"There is a big month-end extension by indexed accounts," said one trader, adding that Bunds had been the biggest beneficiary of that. "When this month-end is over, it's probably going to be a sell again."
This week, larger-than-expected repayments by euro zone banks of three-year loans to the European Central Bank also weighed on German debt.
Investors will get a fresh insight into how fast banks plan to pay back the ECB and at what rate excess liquidity could decline when the second batch of repayments is announced on Friday at 1100 GMT.
Lower-rated debt was mixed in choppy trading, but Italian bonds remained under pressure one day after its debt auction went well but was challenging for the market to absorb.
Investors have, in recent months, piled into Spanish and Italian bonds as their relative return became too good to pass up in a more stable environment. Some say the scale of the purchases has increased the risk of indigestion around auction time.
Ten-year Italian yields were up 3.2 basis points at 4.33 percent.
"At the auction everything went basically smoothly ... but it was just a normal auction. The market seems to be expecting fantastic results in a row, which is simply not sustainable," DZ Bank Christian Lenk said. "With elections looming, Italy is the first candidate for some jitters at some point."
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