EURO GOVT-Bunds fall as investors brace for Fed meeting outcome

Tue Jun 18, 2013 12:16pm EDT

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* Bunds come under selling pressure

* Could outperform Treasuries near-term -analyst

By Ana Nicolaci da Costa and Marius Zaharia

LONDON, June 18 (Reuters) - German Bunds fell on Tuesday on speculation the U.S. Federal Reserve will signal it is edging closer to trimming its bond purchases after a two-day monetary policy meeting.

Economists expect Fed Chairman Ben Bernanke to repeat on Wednesday his recent comment that the purchases could be trimmed at one of the next few meetings, if the U.S. economy continues to improve.

"Most of what we are seeing today is pre-positioning for the big (Fed) meeting tomorrow," David Keeble, global head of fixed income strategy at Credit Agricole said.

"I think the consensus is that he will put the idea of a taper in the market quite firmly but that he will try to mitigate the volatility by emphasising that everything is contingent on everything else."

Bund futures were 57 ticks lower at 143.21.

Concerns over when the Fed may begin unwinding its ultra-loose monetary policy has recently taken a toll on both stock and government bond markets and made them particularly sensitive to data from the world's largest economy.

A release earlier on Tuesday showed U.S. consumer prices rose in May but by less than expected.

"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."

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

Lower-rated bonds, which have also recently seen selling pressure amid doubts over future central bank stimulus, were mixed.

Ten-year Spanish government bond yields were 1.8 basis points lower at 4.57 percent and the Italian equivalent 4 basis points higher at 4.31 percent.

"I saw the Spanish domestic buying Spain and selling Italy," one trader said.

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 62 basis points.

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