Investors dump safe-haven Bunds on upbeat euro zone PMI

Wed Jul 24, 2013 5:01am EDT

Related Topics

* Euro zone private industry unexpectedly returns to growth

* Improving data eases pressure on ECB for rate cut

* Bunds fall, impact on peripheries limited

By Ana Nicolaci da Costa

LONDON, July 24 (Reuters) - German government bonds fell after surveys suggested euro zone private industry unexpectedly returned to growth in July, easing pressure on the European Central Bank to further loosen monetary policy.

Markit's flash Eurozone Composite PMI, based on surveys of thousands of companies across the region and a reliable indicator of growth, jumped to an 18-month high of 50.4 in July from 48.7 in June.

That was better than even the most optimistic forecast in a Reuters poll and is the first month the PMI has been above the 50 mark that divides growth and contraction since January 2012.

"Having an increase in the PMIs in Europe is a positive thing," Natixis fixed income strategist Cyril Regnat said.

"During the last meeting,(ECB President Mario) Draghi announced its forward guidance, but forward guidance with a downward bias. With the confirmation that Europe is progressively recovering, I think the probability of having another rate cut to 0.25 percent is slightly diminishing."

On July 4, the ECB left the door open for further monetary easing, declaring it would keep interest rates at record lows for an extended period and might yet cut further.

German Bund futures fell 50 ticks to 143.32, while 10-year German government bond yields rose 4.4 basis points to 1.59 percent. Two-year German yields were 2 basis points higher at 0.16 percent.

Riskier Spanish and Italian government debt rose in value a little. Ten-year Spanish yields were 2.8 basis points lower at 4.62 percent with their Italian counterparts down 2.9 basis points at 4.33 percent.

In recent months, positive economic data has been a mixed blessing for riskier financial markets.

In theory, good data should be supportive for risky assets because investors favour them when the economy is doing well. But a recent run of good data has fueled concerns that major central banks will start to curb the liquidity measures that have kept the financial system afloat during the debt crisis.

Prices were also little changed elsewhere in the euro zone.

Portuguese yields have fallen in recent days after its government averted a collapse that would have threatened Lisbon's planned exit from its bailout next year.

The president approved on Tuesday the promotion of junior coalition party leader Paulo Portas to deputy prime minister and a wider government reshuffle as proposed by premier Pedro Passos Coelho to ensure the ruling coalition's unity after a rift.

Ten-year Portuguese yields were up 3.1 basis points on Wednesday at 6.54 percent.

The yield gap between five- and 10-year Portuguese bonds has widened in recent days but, at 37 bps, was not far from its narrowest level in over a year of 22 bps, hit earlier this month. A slim gap indicates investors are worried about a country's credit quality.

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