EURO GOVT-Euro zone bonds rally as imminent Fed exit views ebb

Fri Jun 14, 2013 7:59am EDT

Related Topics

* Bonds rally across credit spectrum, led by peripherals
    * Article an excuse to buy back into cheapened markets
    * Markets to remain on edge before Fed meets next week

    By Ana Nicolaci da Costa
    LONDON, June 14 (Reuters) - Euro zone bonds rallied across
the credit spectrum on Friday after sharp losses in recent
weeks, as market opinion swayed away from the idea that the U.S.
Federal Reserve is likely to scale back monetary stimulus soon.
    Investors had been looking for an excuse to buy back into
cheapened markets, analysts said, and a newspaper article
provided one. The Wall Street Journal said an adjustment in the
Fed's bond-buying programme did not mean the U.S. central bank
would end it "all at once" or that the Fed was "anywhere near
raising short-term interest rates".
    "The market was looking for a new reason to come back on the
buying side," said Cyril Regnat, fixed income strategist at
Natixis. "The sell-off has been really massive and with some
mixed data in the U.S., maybe investors were waiting for some
kind of signal."
    With nerves heightened ahead of a Fed policy meeting next
week, some said investors were unwinding their positions after
an "excessive" sell-off prompted by Fed Chairman Ben Bernanke.
    Bernanke told Congress in May that a decision to scale back
the $85 billion in bonds the Fed is buying each month could come
at one of the central bank's "next few meetings" if the economy
looked set to maintain momentum. 
    Friday's rally was led by riskier euro zone debt, with
Spanish government bond yields falling 8 basis
points to 4.54 percent and the Italian equivalent 
falling 8.6 bps to 4.28 percent, having both risen last month.
    Debt issued by bailed-out Portugal climbed even more
sharply, with 10-year yields falling 19 bps to
6.35 percent. Yields on higher-rated euro zone debt also fell. 
    "It's just a bounce from a very aggressive (sell-off)," one
trader said.
    
    FED OUTLOOK
    Financial markets have been choppy in recent weeks, with
trade dominated by views on the timing of a possible Fed exit
from ultra-loose monetary policy, making European assets more
sensitive than usual to U.S. data releases.
    Industrial output and producer price data for May due later
on Friday will provide fresh clues to the health of the world's
largest economy. 
    Figures on Thursday showed U.S. retail sales rose more than
expected in May and first-time applications for unemployment
benefits fell last week.
    Against the backdrop of mixed U.S. data, Commerzbank said in
a research note the Fed should remain on hold and confirm its
bond purchasing programme without any cuts next week.
    "The market's discussion on Fed policy has been completely
and utterly irrational, so divorced from the actual facts of
what the Fed has said," Marc Ostwald, strategist at Monument
Securities said.
    "That article basically has calmed nerves temporarily ... in
principle what it does is encourage people to reach for a bit
more yield."
    German Bunds also rallied. Bund futures rose 52
ticks to 143.71, having hit its lowest since mid-February
earlier in the week at 142.02.
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