EURO GOVT-Deepening euro zone recession buoys safe-haven Bunds

Thu Feb 14, 2013 11:48am EST

Related Topics

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

* Peripheral resilience hints at underlying risk-appetite

* Bunds hover around key technical resistance

By Ana Nicolaci da Costa and 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 predicted.

"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.

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 54 ticks to a settlement close of 142.59.

Weak growth has the double-pronged effect of hampering the economies on the euro zone's fringes as they struggle to escape their large debt burdens, while keeping 'core' German yields low in anticipation of lower European Central Bank interest rates.

Traders also pointed to comments from European Central Bank vice-president Vitor Constancio, who said a negative deposit rate at the central bank remained possible, as supporting Bunds.

"We had weak GDP and then Constancio on negative rates. We've probably over-reacted but that's pushed Bunds up through resistances at 142.15, and now were hovering around another one at 142.55," a trader said.

A decisive break above 142.55, the closing level from Feb. 12, could give scope for a rise to 143, but that marked the top of the recent range and was likely to contain any rallies, the trader said.

PERIPHERAL RESILIENCE

The peripheral market's relatively muted reaction to the GDP data underscores investors' ongoing appetite for risk, made possible by the ECB's pledge that it will intervene should struggling euro zone countries ask for help.

That promise has made investors reluctant to sell Italian and Spanish debt, spurring them instead to return to those markets to earn a profit.

Italian and Spanish bonds erased early losses, with 10-year yields ending the day flat at 4.40 percent and 5.21 percent respectively.

"The resilience of the peripheral debt is quite surprising," said Cyril Regnat, fixed income strategist at Natixis, highlighting the growth data and upcoming Italian elections.

Corruption allegations against Spanish Prime Minister Mariano Rajoy's party and political uncertainty in Italy ahead of this month's election has recently caused a six-month-long peripheral bond rally to pause.

But the correction has been limited despite the risks associated with the Italian vote, which some analysts fear will result in a fragmented parliament and a weak government that will struggle to push through structural reforms.

"If we don't have any sell-off on the debt it means investor concerns regarding these elections are not so high," Regnat said. "For this month, this is probably the biggest risk, at least for Italian BTPs," he added.

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