EURO GOVT-Stronger U.S. growth prospects weigh on German Bunds

Mon May 20, 2013 3:58am EDT

Related Topics

* Bunds fall after Friday's U.S. consumer data

* U.S./German 10-year yield spread around 3-year highs

* Bernanke speech on Wednesday keenly awaited

By Marius Zaharia

LONDON, May 20 (Reuters) - German Bunds fell on Monday after forecast-beating U.S. consumer sentiment data last week dented appetite for low-risk assets.

Friday's data eased worries that the U.S. economy could slow down markedly due to government spending cuts and prompted investors to speculate the Federal Reserve may scale back its bond buying programme later this year.

Fed Chairman Ben Bernanke's testimony before the congressional Joint Economic Committee on Wednesday will be closely scrutinised for any hints on future monetary policy moves.

"We have ongoing buoyancy in stocks ... on the back of unexpectedly firm consumer sentiment survey on Friday," said Richard McGuire, senior rate strategist at Rabobank.

"Bernanke's speech will be the key determinant on whether the recent leg of the 'risk on' rally retains momentum."

Bund futures were 40 ticks lower on the day at 145.05. Friday's low of 145.13 was the first resistance for Bunds, while support was at last week's low of 144.22, Futurestechs analyst Clive Lambert said.

Lloyds strategists said in a note talk of the Fed tapering off bond purchases could fade soon as the central bank was "dominated" by dovish policymakers who would only change their stance if there was evidence of sustainable U.S. growth.

Lloyds therefore recommended buying U.S. Treasuries over Bunds and betting on a narrowing of the 10-year yield spread between them from the three-year high of 64 basis points hit on Friday.

Other analysts see the spread widening further.

"The U.S. economy is outgrowing the euro zone and on the back of this you have different prospects for central bank policies and that's widening the spread," Commerzbank rate strategist Michael Leister said.

"Our house view is that we expect another rate cut from the ECB (European Central Bank) and also a deposit rate cut into negative territory ... Another 15 basis points of widening in the next couple of weeks is feasible."

Other euro zone bonds were relatively stable, with volumes expected to be thin due to a holiday in parts of Europe.

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