EURO GOVT-Fed stimulus concerns weigh on German Bunds

Tue Jun 18, 2013 6:52am EDT

Related Topics

* Bunds fall in line with U.S. Treasuries

* Market seen shaky before Fed, 144.00 hard to break

* Bunds could outperform Treasuries near-term - analyst

By Marius Zaharia

LONDON, June 18 (Reuters) - German Bunds fell on Tuesday, in line with U.S. Treasuries, on speculation the Federal Reserve will this week signal it is edging closer to trimming its bond purchases.

Stimulus from central banks around the world has been the main driver of stock market gains this year but has also capped any rise in top-rated bond yields.

Concern the Fed may buy fewer bonds has since rattled markets. Lower-rated euro zone bond yields lifted off multi-year lows and German yields hit three-month highs last week, before sub-forecast U.S. data on Friday stabilised the market somewhat.

On Tuesday, Bund futures fell 52 ticks to 143.26, with traders reporting low volumes as investors made final position adjustments before the Fed decision on Wednesday.

"(Fed Chairman Ben) Bernanke will probably try to continue to prepare the market for tapering off quantitative easing," DZ Bank strategist Christian Lenk said.

"On the other hand, given the recent rise in yields, he would also be careful not to panic the market."

The Bund future's recent failure to break above 144.00 could also be behind its weakness on Tuesday, Lenk said.

Bund futures hit 143.99 twice before retreating on Monday, with 144 becoming near-term resistance. The 38 percent retracement of the May to June fall at 143.98 is also seen as a shield for the 144 area.

UBS technical strategists said Bunds are likely to fall further near term with the mid-point of their latest recovery at 143.01 and last week's low at 142.02 the next support levels.

One trader said low volumes meant Bunds could rise or fall very rapidly as the market as a whole had "very low conviction" about what the most likely outcome of the two-day Fed meeting.

A Reuters poll showed most economists believe the Fed will reduce its purchases by the end of 2013. A significant number expect the Fed to curb its purchases as early as September.

BUNDS VS TREASURIES

While the price falls in Treasuries have weighed on Bunds recently - with the two assets usually moving in the same direction as both are low-risk - analysts see potential for Bunds to outperform in the near term.

"If you look at Europe, there's uncertainty that there will even be a recovery later this year," Rabobank market economist Elwin de Groot said.

"The ECB will continue to use the verbal intervention weapon to contain money market rates," he said, adding that he saw potential for a 10-20 basis points widening in the yield spread between 10-year German and U.S. debt in the next three months.

European Central Bank President Mario Draghi reiterated on Tuesday the bank was "ready to act" if needed to aid the euro zone economy.

The U.S./German 10-year yield spread was last 63 basis points.

Other euro zone bonds were relatively stable on Tuesday.

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