Bunds fall on solid euro zone, U.S. factory activity figures

Mon Dec 2, 2013 12:31pm EST

Related Topics

* Euro zone factory PMI at 2-1/2 year high

* U.S. factory survey also hits 2-1/2 year high

* Numbers dent hopes for more central bank support

* Portuguese yields rise before Tuesday's bond exchange

By Ana Nicolaci da Costa and Marius Zaharia

LONDON, Dec 2 (Reuters) - German bond yields rose on Monday as data showing factories producing steadily in the euro zone and the United States dented hopes that major central banks will provide further support to the economy.

Portuguese government bond yields also jumped one day before Portugal begins a bond swap exchange aimed at alleviating redemption payments next year.

Euro zone manufacturing accelerated to its fastest pace in over two years last month, a survey showed on Monday, while a separate report showed U.S. factory activity hitting a 2 1/2-year high in November.

While the rates debate takes different paths in Europe and the United States - the first focussed on the timing of more ECB support, the latter on the withdrawal of monetary stimulus - the numbers reinforced the idea of a global recovery.

"On both sides of the Atlantic, the data came in stronger and dashed hopes for longer monetary policy easing or at least trimmed expectations that this is about to happen," David Schnautz, interest rate strategist at Commerzbank said.

Ten-year German yields rose 4.6 basis points to 1.74 percent - the biggest one day gain since Nov. 8 and at the upper end of the 1.65-1.80 percent range held last month.

German Bund futures settled 59 ticks lower at 141.12, as other euro zone debt also fell.

ECB WATCH

Markit's Eurozone Manufacturing PMI rose to 51.6 last month from October's 51.3 - its fifth month above the 50 level where growth starts and the highest reading since June 2011.

Data last week showed inflation rising 0.9 percent in November, above the 0.8 percent forecast and up from 0.7 percent in October, but still below the European Central Bank's target of close to 2 percent.

A sharp fall in inflation in October prompted the European Central Bank to cut its refinancing rate to a record low 0.25 percent. With ECB rates close to zero, further easing would only occur if inflation kept falling, analysts said.

"Any hopes of ECB (easing) are being dampened ... especially with the PMI (Purchasing Managers Index) revised up slightly," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.

The ECB will also release its updated inflation and growth forecasts, which investors will scour for hints on any policy decisions next year.

Traders say that while the market is not positioned for any moves from the ECB this week, there were widespread expectations that President Mario Draghi would emphasise that he was ready to do more to spur inflation and stimulate the economy if needed.

"They (the ECB) will continue to say that rates would stay low and could be lowered further," BNP Paribas rate strategist Patrick Jacq said. "Inflation remains below their comfort area so they can't change their rhetoric but (November's inflation data) won't be a trigger for further action."

While the euro zone manufacturing survey beat expectations, Spain's showed its factory activity contracted for the first time since July.

Spanish 10-year yields rose 4.2 basis points to 4.17 percent, while equivalent Italian yields rose 3.4 bps to 4.08 percent.

Ten-year Portuguese bond yields rose 10 bps on the day to 6.00 percent, while five-year yields were up 19 bps at 5.10 percent.

Portugal will begin to offer to swap 2014 and 2015 bonds for bonds maturing in 2017 and 2018 on Tuesday, the IGCP debt agency said earlier.

"There is a net issuance in bonds in duration because they buy back short bonds and they issue four and five years," one trader said, explaining the pressure on Portuguese debt.

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