German Bunds rise as Fed comments on tapering hit shares

LONDON Wed Aug 7, 2013 3:24am EDT

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LONDON Aug 7 (Reuters) - German Bund futures rose on Wednesday after Federal Reserve officials said the U.S. central bank may scale back monetary stimulus in September, hitting risky assets and supporting safer ones.

Chicago Fed President Charles Evans and Federal Reserve Bank of Atlanta President Dennis Lockhart suggested the central bank may reduce the pace of bond purchases as early as next month, depending on economic data.

Bund futures rose 25 ticks on the day to 142.32, with 10-year cash German yields falling 2 basis points to 1.68 percent. U.S. T-note yields were also 2 bps down at 2.62 percent.

Analysts said Bunds and Treasuries were supported by weakness in European stocks rather than prospects of less central bank demand, because reduced stimulus was "better priced in" by the bond markets.

"More and more the market has priced in the scenario of tapering. Whether it's September or December is less of a factor for bonds," said Elwin de Groot, market economist at Rabobank.

"For equities it's a different story because they've been holding out quite well, with the earnings season confirming that companies - especially in the U.S. - were doing OK."

Germany will sell up to 4 billion euros of five-year bonds later in the day, a sector of the curve that has been historically sensitive to shifts in monetary policy outlooks.

More positive data releases out of the euro zone in recent weeks and an upcoming U.S. 10-year T-note auction could weigh on overall demand for the paper.

However, the European Central Bank's accommodative monetary policy and this month's rise in five-year yields should ensure the auction gets sufficient bids to go smoothly.

"The recent underperformance might look attractive, especially for those who are not convinced that the recent strength of (euro zone) data is going to last," said Newedge market economist Annalisa Piazza.

Five-year German yields were 1 bps down at 0.68 percent, some 18 bps higher than July's lows.

Other euro zone bond markets were relatively steady.

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