EURO GOVT-Japan-fuelled yield hunt, U.S.jobs buoy euro zone debt

Fri Apr 5, 2013 12:25pm EDT

Related Topics

* French, Austrian, Dutch and Belgian yields hit record lows

* Talk of Japanese investors switching into euro zone bonds

* German Bund futures hit 9-month highs on weak U.S. jobs data

By Emelia Sithole-Matarise and Ana Nicolaci da Costa

LONDON, April 5 (Reuters) - Yields on the debt of a slew of euro zone countries hit record lows on Friday, on speculation Japanese investors may be switching out of Japanese debt in search of higher returns in the currency bloc.

Austrian, Belgian and French 10-year yields all fell to new lows after the Bank of Japan unveiled aggressive economic stimulus on Thursday.

Euro zone bonds offering a premium over benchmark issuer Germany were in demand as weak U.S. jobs data and suggestions from the European Central Bank on Thursday it could cut interest rates drove German borrowing costs to nine-month lows.

Analysts expected these trends to extend into next week.

"It seems Japanese investors are making these moves into euro zone semi-core not only because JGB yields are lower and the curve has flattened a lot but also because this new policy could cause further yen weakness. So investors are willing to invest abroad without currency hedging," said Vincent Chaigneau, head of rate strategy at Societe Generale.

Ten- and 30-year debt led the rally as investors favoured longer-dated euro zone bonds after the BOJ said it would double its holdings of long-term government bonds as part of a plan that would see it inject $1.4 trillion into the economy in less than two years.

Austrian 10-year yields hit a record low of 1.477 percent, Belgian yields plumbed a historic trough of 1.93 percent and the French equivalent was at a new low of 1.72 percent.

"The extent of the rally and the way that 30s have abnormally kept up with the move is very indicative of flows driving it," Andy Chaytor, strategist at Nomura said. "You don't normally get those kind of moves just on a marking basis."

Lower-rated bonds also benefited from the hunt for higher returns, with 10-year Spanish borrowing costs falling 17 basis points to 4.76 percent and Italian yields 20 bps lower at 4.38 percent.

GROWTH FOCUS

Some analysts, however, said renewed concerns about the U.S. growth outlook after Friday's weak non-farm payrolls report and softer data this week could refocus investors on anaemic growth in the euro zone, tempering demand for peripheral debt.

German Bund futures hit 146.54, their highest since June 2012, after the U.S. data showed 88,000 jobs were created in March, missing consensus expectations of 200,0000 and last minute talk of 120,000.

The Bund contract settled at 146.34, up 38 ticks on the day, with cash 10-year yields down 4 bps at 1.20 percent. That was their lowest since July 2012 before ECB President Mario Draghi vowed to do whatever it took to save the euro and unveiled a new bond buying scheme to contain the debt crisis.

"It's too early to go short Bunds. We see a combination of forces supporting them: the U.S. data is going to be less buoyant than in Q1 and then the talk of monetary easing," Chaigneau said.

"It will be hard for the Bund to break below 1.15 percent in the 10-year (yield). Once we test it, it will probably meet some resistance but I think it's too early to go short."

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.