EURO GOVT-Italy, Spain outperform as U.S. data boosts risk

Fri Jun 7, 2013 1:04pm EDT

Related Topics

* Italian, Spanish debt rebounds after Thursday's sell-off

* U.S. jobs data seen not strong enough to cut Fed stimulus

* German Bunds dip in choppy trade after U.S. data

By Emelia Sithole-Matarise

LONDON, June 7 (Reuters) - Italian and Spanish bonds outperformed other euro zone debt on Friday after U.S. jobs data showed the economy was growing modestly but not enough to hasten the Federal Reserve's stimulus measures.

Safe-haven German Bunds dipped in choppy trade as investor appetite for riskier assets improved after the non-farm payrolls report showed U.S. employers added 175,000 jobs last month, just above the median forecast in a Reuters poll. The unemployment rate ticked a tenth of a percentage point higher to 7.6 percent.

Financial markets had been nervous before the report that a robust recovery in the jobs market could prompt the Fed to starting reducing its asset purchases, which have pushed investors into equities and higher-yielding bonds.

"The improvement in the labour market is there but it's not as strong as one would have expected for the Fed to start tapering so it has created a good momentum in riskier assets and that's what's supporting the periphery," said Gianluca Ziglio, head of fixed income research at Sunrise Brokers.

Italian 10-year bond yields fell 14 basis points to 4.19 percent while equivalent Spanish yields were down 11 bps at 4.55 percent.

The rally was also helped by short-covering of short positions following a broad sell-off in euro zone bond markets the previous day after comments by European Central Bank President Mario Draghi doused expectations of imminent further policy measures from the bank.

"The market probably over-reacted yesterday because the market interpreted Draghi's comments as less dovish than expected but, in the end, they still left open the possibility to act further if the data worsens," Alessandro Giansanti, senior rates strategist at ING in Amsterdam, said.

After holding its main interest rate at a record low 0.5 percent, the ECB said it discussed cutting its deposit rate to below zero but would keep this and other unconventional options "on the shelf" for now.

ICAP strategist Philip Tyson said lower-rated debt could come under further selling pressure over the longer term.

Just as the ECB's bond-buying programme remains untested, the prospect of negative deposit rates seemed some way off given internal disagreements within the ECB, he said.

"I am wondering if the market is seeing through the verbal support and needs to see something more solid," he said.

Portuguese and Greek bonds underperformed on concern that clashes between the European Union and the International Monetary Fund over the handling of Greece's first bailout could complicate future international rescues for the bloc's strugglers.

German Bund futures reversed gains after the U.S. data to settle 6 ticks down on the day at 143.39 while 10-year yields were flat at 1.50 percent.

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