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Upbeat U.S. data pushes Bunds lower before Fed statement

Wed Jul 31, 2013 12:25pm EDT

* U.S. GDP, employment data beats expectations

* Data firms expectations Fed will scale back stimulus

* Germany sells 1.63 billion euros of 30-year bonds

* Bunds reverse post-auction gains

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, July 31 (Reuters) - German government bonds fell on Wednesday after stronger-than-expected U.S. economic data reinforced expectations the Federal Reserve will soon start scaling back monetary stimulus.

The Fed will issue a statement at 1800 GMT after a monetary policy meeting and investors will be looking for clues to when it will start reducing its $85 billion a month bond purchases and to how long it will keep interest rates at record lows.

The Fed has said the timing of so-called "tapering" will depend on data so an unexpected acceleration in second-quarter U.S. economic growth and an above-forecast increase in private sector payrolls in July firmed up expectations that stimulus will be scaled later this year.

Bund futures were down five ticks at 142.40, having hit the day's low, 141.82, after the GDP data. Traders said the rebound reflected investor caution before the Fed statement.

"We don't expect a significant change in their overall language ... nothing that would change expectations about tapering by the end of the year, which were clearly reinforced by today's data," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

In his view, the "appropriateness" of the immediate market reaction to the data should be questioned given that the euro zone economic recovery still lagged that of the United States and that the European Central Bank, which meets on Thursday, is not expected to tighten policy any time soon.

The U.S. data erased early Bund gains made after a 1.62 billion euro German 30-year debt sale met solid demand. Investors bid for 1.6 times the amount allotted, compared with 1.5 times at the previous such sale in April.

Investors were drawn to the sale by a 50 basis point rise in yields since early May. Month-end related buying also supported demand, some traders said.

Long-dated German debt outperformed. Thirty-year yields fell 1 basis point to 2.48 percent, while 10-year yields rose 1 bps to 1.68 percent.

"It was a good auction given that the Fed is looming and the market has taken a favourable view," Commerzbank rate strategist Michael Leister said.

"There's room for the ultra-long end to perform as well. We've seen quite a decent steepening of the 10/30s curve and overall it still looks steep, so there might be some interest to put on tactical trades with the supply out of the way."

Other euro zone bonds were broadly steady. Investors shrugged off concerns about an upcoming supreme court ruling on former Italian premier Silvio Berlusconi's last appeal against a jail sentence and ban from public office for tax fraud.

A ruling against him could endanger the shaky coalition government.

 
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