Bunds hit 3-week highs as mixed data keeps central banks dovish
By Marius Zaharia
LONDON, Sept 25 (Reuters) - German Bund futures edged up to their highest in three weeks on Wednesday, gaining support from mixed economic data and reassurances from central banks that their policies will remain accommodative.
Data on Wednesday showed German consumer sentiment hit six-year highs, meeting expectations, but French industry morale fell and undershot forecasts. On Tuesday, the German Ifo business sentiment survey rose less than forecast.
This week's economic figures raised the risk that markets are pricing in a faster recovery than they should and supported top-rated government paper.
"Investors are looking for signals that the economic recovery will continue in the euro zone. Recent indicators have been mixed," said Rabobank market economist Emile Cardon, who expected lower German yields in the near term.
Bund futures were 11 ticks up on the day at 139.65, having hit a three-week high of 139.86 earlier in the session. They were about two-and-a-half points above the lows hit before the U.S. Federal Reserve shocked the market by deciding not to begin trimming its stimulus last week.
The Fed was not the only central bank that surprised markets with its soft stance.
European Central Bank policymakers including President Mario Draghi said earlier this week that it was too early to end crisis measures and that unconventional tools such as new long-term loans to banks remained a possibility.
Ten-year cash German yields fell 1 basis point to 1.79 percent.
Helped mainly by the ECB's reassurances of a loose policy, Italy paid the lowest yield in four months to sell zero-coupon two-year paper on Wednesday.
"The central banks are guiding us through," one trader said.
Pressure on longer-term Italian debt has also eased after former premier Silvio Berlusconi last week stepped back from threats to bring down the government if he was expelled from parliament following a tax fraud conviction.
Italian 10-year yields were 2 basis points higher at 4.25 percent. Italy plans to sell up to 6 billion euros of five- and 10-year conventional bonds on Friday.
USED TO U.S. SHUTDOWN THREAT
Traders said concerns about a possible U.S. government shutdown limited room for any fall in Bunds, still a safe-haven for investors in times of political and fiscal nervousness.
Congressional authorisation for the government to spend money runs out on Sept. 30. U.S. politicians are engaged in discussions to pass a resolution to keep the government running, but have not yet reached common ground.
"So far there is little evidence of stress ... (but) it can be a key market driver at some point," BNP Paribas rate strategist Patrick Jacq said.
"We've already had this sort of problem several times in the past. The market is used to that, but probably it's a mistake because at some point we might have a government shutdown."
French 10-year yields were steady at 2.37 percent as Paris announced plans to borrow slightly more next year on the back of a worse-than-expected 2013 budget deficit.
"France is an outlier in Europe. Investors realise the problems with growth ... (and that) it is lagging on reforms," Rabobank's Cardon said. "Long-term this will be a problem, but in the short-term investors know they'll get their money back."
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