EURO GOVT-German Bunds rebound before U.S. data steer

Tue Jun 25, 2013 6:50am EDT

Related Topics

* Bund futures bounce off eight-month lows

* Investors wary of U.S. data, ECB policymakers

* Other euro zone bonds stable, but Italy underperforms

By Marius Zaharia

LONDON, June 25 (Reuters) - German bond prices rose on Tuesday, with uncertainty before U.S. data prompting investors to buy back some of the debt sold in anticipation of a reduction in Federal Reserve stimulus.

The Fed said last week its monetary policy outlook would depend on how the economy performs, making investors extra cautious before U.S. data releases. Durable goods, consumer confidence and housing data are all due later in the day.

Bund futures were up 53 ticks at 140.84, having fallen by almost three points in the previous four sessions to hit an eight-month low of 139.90 on Monday. Cash 10-year German yields were down 5 basis points at 1.77 percent, off Monday's 14-month highs of 1.85 percent.

"We have a lot of headline risk ... so you could argue that we may hit 1.70 (percent in German 10-year yields) before we move towards 2.40 (percent)," one trader said.

The 2.40 percent level is just above the roughly one percentage point range set by safe-haven Bunds since late 2011, at the height of the euro zone crisis when Italian and Spanish yields traded at unsustainable levels.

The trader said Bund yields could hit that in the next few months if U.S. data reinforces the Fed's stance.

A different outlook for the euro zone economy may, however, cap yields at lower levels, analysts said.

European Central Bank policymaker Benoit Coeure said the bank was far from exiting accommodative monetary policy and will keep an open mind about new easing measures.

The Frenchman also said that the ECB needs to make sure that the Fed's plans do not hit euro zone bonds. His stance posed questions about the recent selloff in euro zone debt markets.

"We've had an almost similar pass-through from U.S. Treasuries to European bonds. If you look at the fundamentals, perhaps there shouldn't be such a high pass-through. At some point you would expect a counter reaction from the ECB," Rabobank market economist Elwin de Groot said,

A trader said Coeure's "dovish" comments supported Bunds, but the market has already prepared for a soft tone from the ECB at the start of the session so Bund gains after his speech were limited. ECB President Mario Draghi speaks later in the day.

In Italy, 10-year yields were 4 bps higher on the day, reversing a fall at the start of the session after a debt auction saw the country's two-year borrowing costs hitting their highest level since September.

Equivalent Spanish yields were 2 bps lower at 5.03 percent,

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