EURO GOVT-Positive U.S. data weighs on safe-haven Bunds

Mon May 20, 2013 11:47am EDT

Related Topics

* Upbeat U.S. consumer data sours appetite for safe-haven debt

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

* Bernanke speech on Wednesday keenly awaited

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, May 20 (Reuters) - Low-risk German Bunds fell on Monday in the wake of upbeat U.S. data last week that eased concern about growth in the world's biggest economy, but a bleak euro zone outlook was expected to limit losses.

Friday's U.S. consumer sentiment report allayed fears that the economy could slow markedly due to government spending cuts. It also led investors to speculate over whether the Federal Reserve may scale back its bond buying later this year.

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

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

"The European data has failed to come through with any significant improvement, and that will remain the case...If you continue seeing weaker figures for Germany which has been the growth engine for Europe then it's fairly worrying," said Elisabeth Afseth, fixed income analyst at Investec.

"In the short run the 'low rates for longer' story will dominate, and we could see (Bund) yields go a bit lower rather than higher."

Bund futures fell 59 ticks to settle at 144.86. 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 5 basis points at 1.36 percent.

"I still think there's a downward bias in core yields going forward and I can see the Bund returning towards the 1.20 (percent) lows again," one trader said.

Lloyds strategists said in a note that 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."

Other euro zone bonds were relatively stable, with activity subdued due to a holiday in parts of Europe.

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