EURO GOVT-Improving U.S. growth outlook weighs on Bunds

Mon May 20, 2013 7:09am 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) - Safe-haven German Bunds fell on Monday after forecast-beating U.S. consumer sentiment data last week, but a bleak outlook for the euro zone was expected to limit losses.

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

However, with the euro zone still in recession and investors expecting the European Central Bank to ease its policy further, benchmark Bund yields remained anchored around record lows.

"I don't see Bund (yields) going much higher than this. The situation in the euro zone will probably deteriorate further and keep the ECB on the dovish side," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers.

Bund futures fell 54 ticks to 144.91. Resistance was seen at Friday's low of 145.13, with support at last week's low of 144.22, Futurestechs analyst Clive Lambert said.

Cash 10-year Bund yields were up 4.3 basis points at 1.358 percent. Ziglio said they were likely to fall towards the lower end of the 1.2-1.4 percent range seen since mid-March.

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 recommended buying U.S. Treasuries over Bunds and betting their 10-year yield spread would narrow from the three-year high of 64 bps 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.

"Another 15 basis points of widening in the next couple of weeks is feasible."

Fed Chairman Ben Bernanke's testimony before the congressional Joint Economic Committee on Wednesday will be closely watched for clues on future policy moves.

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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