EURO GOVT-Euro zone bonds rally on yield-hunt frenzy

Fri Apr 5, 2013 7:45am EDT

Related Topics

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

* Talk that Japanese investors switching into euro zone bonds

* German bonds expensive, have limited room to rise

By 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 that Japanese investors may be switching out of Japanese government bonds into euro zone paper or may eventually do so.

Ten-year Austrian yields hit a record low of 1.495 percent, Belgian yields eased to a historic low of 1.93 percent and the French equivalent to a new low of 1.72 percent.

The Bank of Japan on Thursday announced extraordinary stimulus steps to revive the world's third-largest economy, taking Japanese yields to record lows of 0.315 percent earlier.

The preference for euro zone bonds offering a premium over Germany comes as German borrowing costs fell to eight-month lows after the European Central Bank said on Thursday it was ready to act to boost the economy, suggesting it could cut interest rates.

"There is no question that Asian demand for semi-core is quite strong and I think, in light of yesterday's BOJ move, the expectation is that that's going to continue. I am fairly certain that there has been some flows," one trader said.

Philip Tyson, strategist at ICAP, told Reuters Insider there had been talk of life insurance companies switching out of Japanese bonds overnight in search of yield, potentially into European debt.

The move coincided with Japanese 10-year yields hitting record lows, a day after the BOJ vowed to inject about $1.4 trillion into the economy in less than two years in a dose of shock therapy to end two decades of deflation.

The rally was led by 10- and 30-year debt as investors favored longer-dated euro zone bonds after the BOJ said it would double its holdings of long-term government bonds.

"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 yield, with 10-year Spanish borrowing costs falling 5.3 basis points to 4.88 percent and Italian ones 10 bps lower at 4.48 percent.

"The strong sell-off we saw today in the JGB sector offered some evidence that private investors in Japan have no longer appetite for domestic sovereign debt," said Patrick Jacq, rate strategist at BNP Paribas.

BREAK-UP LEVELS

The German Bund futures contract rose to its highest since July, extending an ECB-fueled rally in the previous session, but attention has now turned to U.S. jobs numbers later in the day.

ECB President Mario Draghi said the bank would monitor incoming data very closely and was ready to act if necessary, opening the door for an interest rate cut.

Even though the sluggish economic backdrop and the turmoil created by Cyprus's bailout deal were supportive for safe-haven debt, analysts said German bonds were at costly levels and any upside was limited.

"We are at similar levels to when the risk of EMU collapse (was being) priced in," Jacq, said.

"The market is very, very expensive," he said. "I would rather be short at current levels, below 1.30 (percent)."

German Bund futures were 19 ticks higher on the day at 146.15, pushing 10-year yields 1.4 bps lower to 1.23 percent - their lowest since August last year.

U.S. data later in the day is expected to show the U.S. economy probably added 200,000 jobs last month, with the jobless rate steady at 7.7 percent, according to a Reuters survey of economists.

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