EURO GOVT-Forecast-beating U.S. data shackle Bund rebound

Tue Jun 25, 2013 11:02am EDT

* U.S. consumer, housing data beats expectations

* ECB says far from exiting accommodative policy

* Italy underperforms due to supply pressure

By Marius Zaharia

LONDON, June 25 (Reuters) - German bond prices pared earlier gains on Tuesday, after stronger-than-expected U.S. data reinforced expectations that the Federal Reserve will reduce monetary policy stimulus later this year.

The Fed said last week its monetary policy outlook would depend on how the economy performs, making investors extra cautious before data releases and leading to an early session bounce for Bunds after sharp falls in past sessions.

But gains almost evaporated after U.S. data on durable goods, consumer confidence and new home sales beat expectations.

Analysts said the fact that Bunds were unable to sustain the rise was a sign German debt was vulnerable to more losses as investors prepare for less U.S. money printing.

"The correction (in Bunds) today hasn't been sustained which is not a positive sign," said Jamie Searle a rate strategist at Citi in London.

Bund futures were 14 ticks higher on the day at 140.45, having risen as high as 141.01 earlier in the session. In the previous four days they have fallen by almost three points and on Monday they hit an eight-month low of 139.90.

Cash 10-year German yields were flat at 1.81 percent, off Monday's 14-month high of 1.85 percent. One trader said they could rise to 2.4 percent in coming months if U.S. data remains strong.

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.

DOVISH ECB

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

European Central Bank President Mario Draghi said an accommodative monetary policy was still appropriate, while his French colleague Benoit Coeure said the bank needed to make sure that the Fed's plans do not hit euro zone bonds.

The ECB's 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,

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.

Pre-positioning before the country's medium- and long-term debt sales on Thursday was also hitting Italian bonds, traders said. Equivalent Spanish yields were 2 bps lower at 5.03 percent.

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