EURO GOVT-Bunds stable as U.S. growth bets offset ECB effect

Mon May 6, 2013 10:21am EDT

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By Marius Zaharia and Ana Nicolaci da Costa

LONDON, May 6 (Reuters) - German Bunds held stable on Monday, with bets that the U.S. economic recovery will regain momentum offseting support from expectations the European Central Bank may ease policy further.

Bund futures rose to new highs last week after the ECB cut its key interest rate to a new record low of 0.50 percent and left the door open to further monetary easing.

But on Friday they posted the biggest daily loss since early March after data showed U.S. employment rose more than expected in April, denting appetite for low-risk assets.

The future was last 13 ticks lower on the day at 146.02 and a shade above Friday's low, having risen as high as 147.20 last week. Cash 10-year German bond yields were 1.2 basis point higher at 1.26 percent.

"We saw quite a move into equities on Friday, but still we expect support from central bank (policies)," said Emile Cardon, market economist at Rabobank in Utrecht.

"I expect a near-term trading range of 1.20-1.40 percent, but a bit more volatile given these two divergent themes: (U.S.) macro data and expectations of a cut by the ECB."

Bund futures moved within a roughly 30-tick range on Monday, with trading volatile as volumes sank due to a UK bank holiday. By 1400 GMT, about 200,000 lots had switched hands, compared with almost 900,000 on Friday.

Data in the euro zone contrasted with U.S. figures.

Retail sales in the euro zone fell for the second month in a row in March, in line with expectations, and surveys showed a business downturn continued in April, even though the final index improved on an initial reading.

"We are still in an environment of low growth in the euro area and the ECB has done less than other central banks... so they have to do another step in terms of easing. This expectation will keep the bond market bullish and German yields lower," Alessandro Giansanti, senior rate strategist at ING said.

Lower-rated Italian and Spanish bond yields rose after hitting their lowest since 2010 on Friday.

Ten-year Spanish yields rose 5.8 basis points to 4.09 percent and the Italian equivalent edged 4 bps higher to 3.85 percent.

"The continued grab for yield amid the accommodative stance means peripherals still remain well supported. We think the rally in Spain has gone very far and we prefer Italy to Spain in the five-year sector," Nick Stamenkovic, strategist at RIA Capital Markets added.

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