EURO GOVT-Bonds fall after Fed signals slower asset-buying

Thu Jun 20, 2013 3:54am EDT

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* Bunds fall more than a point, hit lowest since February

* Other euro zone debt prices also plunge

* Spain, France to hold "difficult" debt sales

By Marius Zaharia

LONDON, June 20 (Reuters) - Euro zone debt fell across the board on Thursday and was expected to weaken further after the Federal Reserve signalled it was ready to reduce its bond purchases if its economic forecasts were met.

Fed Chairman Ben Bernanke said the U.S. economy was growing fast enough to allow the central bank to trim its $85 billion monthly stimulus, with the goal of ending it in mid-2014.

German Bunds sank to their lowest since February, while lower-rated debt yields jumped, with some analysts pointing to risks that higher borrowing costs could bring still unsolved structural issues in the euro zone back into focus.

"The expectation was that (Bernanke) would have been a lot more balanced and the market sees this as the beginning of a long process of tightening," ICAP strategist Philip Tyson said.

Peripheral debt has rallied sharply over the past year on the back of liquidity from the world's major central banks and the promise of European Central Bank bond purchases if a country asked for financial assistance.

With the first factor seen diminishing, a Spanish debt auction later in the day will be closely watched for any sign of weakening demand.

Bund futures were last down 131 ticks at 142.13, having hit 141.95 earlier, their lowest since February. Ten-year German yields rose 9 basis points to 1.65 percent.

German debt often moves in the same direction as U.S. Treasuries due to the two assets' safe-haven status. Ten-year U.S. T-note yields hit 15-month highs of about 2.38 percent in the wake of the Fed announcements.

Bund losses are expected to be capped by the fact that the euro zone economy lags that of the United States; analysts said euro zone PMIs later on Thursday could provide temporary support.

"The PMIs might provide a bit of a reality check and core bonds may find a bit of support at these yield levels, but the risk is ... (to see) higher yields in the immediate future," ICAP's Tyson said.

Italian 10-year yields rose 14 bps to 4.40 percent, while Spanish equivalents jumped 16 bps to 4.68 percent.

Portugal, which is nearing the end of its bailout programme, underperformed, with its 10-year yield rising 25 bps to 6.34 percent.

"The risk is that if bond yields rise more, that in itself is going to compound the issues in the euro zone, particularly in the periphery. It threatens to throw up another mini crisis in the euro zone," Tyson said.

Spain plans to sell 3-4 billion euros of 2018, 2021 and 2023 bonds later in the day, while France plans to issue 7.5-9.0 billion euros of fixed rate and inflation-linked paper.

The market will focus on Spain.

"It's going to be difficult because risk assets seem to be hurt just as much as core assets. It's going to be a hard day, very volatile," one trader said.

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