German yields rise as GDP data confirms euro zone recovery bets
LONDON Aug 14 (Reuters) - German bond yields hit their highest levels since late June on Wednesday as growth data out of Germany and France confirmed expectations that the euro zone is recovering from recession.
The German economy grew by 0.7 percent in the second quarter of 2013, its largest expansion in more than a year, and France posted economic growth of 0.5 percent in the same period.
The numbers from the euro zone's biggest and second largest economies overshot forecasts and reinforced bets that data at 0900 GMT will show the currency bloc has moved out of recession.
The recent pick-up in German yields should attract demand at a sale of up to 4 billion euros of 10-year German bonds, analysts said, even though a better economic backdrop tends to dent appetite for safe-haven assets.
"To an extent it was already priced in. We already had in the last couple of days more positive data pointing to a GDP surprise so that's being confirmed now," Elwin de Groot, senior market economist at Rabobank said.
Ten-year German yields were last flat at 1.82 percent having earlier risen as far as 1.84 percent, its highest since June 24. A move above 1.853 percent would take German borrowing costs to their highest levels since April last year.
"We are at historically high yields now... that in itself is a good enough concession for the auction to go well," one trader said.
German Bund futures fell 7 ticks to 140.79, having seen their biggest daily drop since March in the previous session.
The reaction of peripheral debt to the data was also muted given that investors had already priced in an improvement in the economy by taking 10-year Spanish and Italian yield spreads versus German Bunds to two-year lows this week.
The 10-year yield gap between Spanish and German government bonds was at 267 basis points and the Italian equivalent was at 241 bps - both little changed on the day.
Data out of the United States and the United Kingdom have also recently pointed to better prospects for the global economy and higher yields across safe-haven debt indicate investors are preparing for less central bank liquidity going forward.
Investors, meanwhile, are still keeping a close eye on data and policymaker comments to gauge how quickly the taps will be turned off. Against this backdrop, British unemployment data and Bank of England policy minutes will be under particular scrutiny.