EURO GOVT-Bunds rise the day after weak growth data, G20 eyed

Fri Feb 15, 2013 4:19am EST

Related Topics

* Bunds rise as data reinforces accommodative rate policy

* G20 meeting unlikely to soothe euro strength concerns

* Italian bonds seen vulnerable in run-up to elections

By Ana Nicolaci da Costa

LONDON, Feb 15 (Reuters) - German Bunds rose on Friday the day after euro zone data reinforced the case for an accommodative rates policy while analysts said a Group of 20 meeting was unlikely to soothe concerns about a strong euro.

The so-called "currency wars" will feature high on the agenda of the meeting in Moscow and hosts Russia say the G20 will back the thrust of a G7 text which reaffirmed a commitment to floating exchange rates.

"The market thinks the G20 cannot do very much about this, it basically means that the euro in the current conditions will have a tendency to appreciate ...," Elwin de Groot, senior market economist, at Rabobank said.

"Taking these things together - economic weakness (and) persistent prospect of potential further upward pressure on the euro - that could provoke action by European monetary policymakers. For the Bund, it's positive because it raises the potential for falls in money market rates."

German Bund futures rose 27 ticks to 142.86, having rallied half a point on Thursday after data showed the euro zone fell deeper into recession than expected in the fourth quarter of 2012.

Euro zone money market rates dropped on Thursday after the disappointing data. Their rise was arrested by ECB President Mario Draghi who said last week he would monitor money markets to ensure policy remains "accommodative".

He was referring to the rise in money market rates after the higher than expected repayment of ECB crisis loans was seen by many as a de facto tightening of ultra-loose monetary policy and as one reason why the euro strengthened.

Norbert Aul, rates strategist, at RBC Capital Markets also said the rise in the Bund was a continuation of the previous day's trend driven by weak euro zone gross domestic numbers and an accommodative stance by the ECB.

ECB Vice-President Vitor Constancio said on Thursday that the ECB is technically ready but has not decided whether to lower the interest rate on banks' deposits at the central bank into negative territory.

"The ECB verbally intervened already in terms of highlighting their accommodative stance at the past press conference. ECB's VP Constancio actually went one step further as he opened up the discussion about negative rates again," Aul said.

Aul also said the risks associated with the Italian election, including that of a hung parliament, were not sufficiently priced in by the market.

"This should weigh on peripherals in the run-up to the elections and, depending on the election outcome, potentially also after that, which is another factor to support Bunds."

Ten-year Italian government bond yields were up 3 basis points at 4.42 percent. The Spanish equivalent were 4.1 bp higher at 5.24 percent. (Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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