EURO GOVT-Weak euro zone, U.S. data push Bunds to four-week high

Thu Feb 21, 2013 11:27am EST

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By Marius Zaharia and William James

LONDON, Feb 21 (Reuters) - German Bund futures hit four-week highs on Thursday after business surveys of the euro zone and United States came in weaker than expected, prompting investors to flock towards low-risk assets.

Bunds are likely to hold on to their gains at least until next week, after Italian elections, analysts said.

Investors looking for signs that the euro zone was emerging from recession were left disappointed by business activity data showing the economic downturn in the region unexpectedly worsened in February.

A survey by the Federal Reserve Bank of Philadelphia then beat even the most pessimistic forecasts. The number of Americans filing new claims for unemployment benefits also rose faster than expected.

The data pushed safe haven Bund futures as high as 143.51, the highest since Jan. 25, with traders citing automated buying at the Feb. 11 high of 143.11 - the top of the range seen over the past four weeks.

"When compared with the tight range in the past four weeks this is an important breach. I wouldn't underestimate it," Mizuho strategist Ricardo Barbieri said.

UBS technical strategist Richard Adcock was caught off guard by the move. He activated a stop on his recommendation to sell Bunds, established at 142.95, and now sits on the sidelines waiting for clues from momentum indicators, such as the Moving Average Convergence Divergence, a tool widely used by chartists.

"With the MACD threatening to close above its zero line, if this is confirmed on a closing basis, the door will be opened back to the January 24 high at 144.07," Adcock said in a note.

SPAIN OUTPERFORMS ITALY

Despite the cautious tone ahead of the vote, Italian 10-year yields were 5 bps higher at 4.474 percent, well below peaks of 4.64 percent seen earlier this month.

The risk of the Italian vote producing a fragmented parliament with limited ability to pursue reforms has been balanced by the market's belief that the European Central Bank remains an effective buyer of last resort.

That has calmed nerves, ensuring most selling by investors worried about the election outcome has been met by buyers who have faith in the central bank backstop.

Spain cashed in on investors appetite for higher-yielding peripheral bonds, raising an above-target 4.2 billion euros at auction just a day after the country issued its first dollar bond since 2009.

"That was a very good auction in pretty much every aspect ... It's been a long time since the big skew has been towards the 10-year in distribution terms," said Marc Ostwald, strategist at Monument Securities, referring to the large amount of 10-year paper sold relative to less risky, shorter issues also on offer.

Spanish bond yields have pulled back somewhat after rising in early February when a political scandal brought calls for Prime Minister Mariano Rajoy to resign. Since then, Spain has outperformed Italy, leaving the spread between the two at its narrowest since early November.

Ten-year Spanish yields were 1 bps higher on the day at 5.21 percent, wiping out an early rise as markets welcomed the auction result.

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