Bunds hold near two-month highs on euro zone recovery worries

LONDON Fri Oct 25, 2013 3:54am EDT

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LONDON Oct 25 (Reuters) - Bund futures held near two-month highs on Friday before the release of a German business sentiment survey that will give more clues to the strength of the euro zone economic recovery.

The Ifo survey is expected to edge up to 108.0 in October from 107.7 a month before, but traders said some investors are positioning for a smaller number after weaker data this week.

A run of improving economic data has weighed on Bunds and supported lower-rated debt in the past few months.

The euro trading around two-year highs versus the dollar is an additional worry for the currency bloc, where stronger exports are needed to foster the type of growth that could bring debt levels down to more sustainable levels.

Bund futures were 3 ticks higher at 140.90, with Thursday's two-month high of 141.22 still in sight. Cash 10-year German yields were flat at 1.77 percent.

"We are getting concerned about the (euro zone) recovery and I don't think the strong euro will help (curb) that sentiment in any way," one trader said.

Thursday's below-forecast manufacturing and services surveys have also pushed up Spanish and Italian yields from five-month lows, although expectations central banks will maintain ultra-easy policy are likely to support both top and lower-rated debt.

Spanish 10-year yields were 3 basis points higher at 4.17 percent, while equivalent Italian yields were 4 bps up at 4.18 percent.

"Similar to equity markets, what we have is different types of assets driven by liquidity," said Bayerische Landesbank chief strategist Marius Daheim.

He does not expect the European Central Bank to inject more liquidity into the market to curb the strong euro, as some have bet, but he has pushed back his forecast on when the Federal Reserve will start trimming its stimulus to March from December.

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