EURO GOVT-Bunds rebound after data highlights euro zone weakness

Thu Feb 14, 2013 5:41am EST

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* Bund futures rise half a point as GDP data falls short

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* Technical charts point to fresh losses for Bunds

By William James

LONDON, Feb 14 (Reuters) - German Bund futures rose on Thursday as economic growth data for the euro zone fell short of expectations and pushed some investors towards the safety of low-risk bonds.

The euro zone economy slipped deeper into recession than expected in the last quarter of 2012, contracting 0.6 percent compared to a forecast of 0.4 percent. Germany, France and Italy -- the region's three largest economies -- all performed worse than forecast.

That propelled German bonds -- which are seen as a safe but low-yielding place to park cash during times of stress -- higher on the day. Bund futures rose 55 ticks to 142.60.

"This is not good news. It shows a need for fairly relaxed monetary policy for some time to come and it increases the risk on the peripherals," said Elisabeth Afseth, analyst at Investec in London.

Weak growth has the double-pronged effect of hampering the weaker economies on the euro zone's fringes as they look to escape their large debt burdens, and keeping 'core' German yields low in anticipation of a low ECB interest rate.

Italian yields rose 3 basis points on the day to 4.42 percent while the Spanish equivalent nudged 2.5 basis points higher to 5.23 percent.


However, the relatively small size of the market's reaction to the data reflected the market's underlying optimism that the worst of the crisis had passed.

"The figures came out worse than expected but this was somewhat priced in. The market is forward looking and expecting a recovery in the second half of this year," said Alessandro Giansanti, strategist at ING in Amsterdam.

"There's a mild widening in the periphery today but I don't see this as the start of a new trend."

Italian and Spanish bonds have performed strongly this week, and Italy was able to complete its first sale of 30-year debt in nearly two years on Wednesday.

This positive undercurrent left the Bund future vulnerable to further falls, which could be exacerbated by any breach of technical chart levels, market participants said.

A close below 141.90 would probably be enough to turn momentum indicators negative on the Bund, said UBS technical analyst Richard Adcock, triggering a fresh trade recommendation targeting a fall to 140.20 over the next few days. (Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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