German Bunds turn flat after upbeat euro zone PMI

LONDON Mon Dec 16, 2013 4:24am EST

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LONDON Dec 16 (Reuters) - German Bunds pared an early rise on Monday after a survey showed euro zone private sector activity surpassed expectations in December, against a backdrop of investor caution ahead of the Federal Reserve's rate meeting this week.

Bunds rose in early trade after separate surveys showed private sector activity in France slowed unexpectedly in December, while growth in activity in China's vast factory sector slowed to a three-month low.

But similar surveys showing the euro zone's private sector ending the year on a high dented appetite for safe-haven debt, even though the data underlined the widening gap in performance between the euro zone's two largest economies.

German Bund futures were down 5 ticks at 140.20. Other highly-rated euro zone debt were also unchanged, with the ten-year French bond yield flat at 2.25 percent.

Markit's preliminary composite Purchasing Managers' Index (PMI) for Germany, which tracks growth in the manufacturing and services sectors, stood at 55.2 in December, comfortably above the 50 mark that separates growth from expansion.

"Certainly the Chinese PMI manufacturing flash survey was disappointing. That put some pressure on Asian equities giving Bunds a bit of a lift at the open. But the PMI manufacturing in Germany surprised on the upside so that's taken any momentum out of the Bund market," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Ten-year German yields were flat at 1.84 percent, while two-year yields were steady at 0.23 percent, having recently underperformed as falling money market liquidity weighs on the short-end of the German curve.

Ten-year German yields, however, were well within this month's 1.70-1.89 percent range as investors played it safe before the Fed's Dec. 17-18 meeting.

Even though the consensus is still for the Federal Reserve to begin scaling back asset purchases in March, a slew of upbeat U.S. data recently has increased speculation that tapering could come as soon as this week.

"We think there is a case for a bit more cautious approach going into the (Fed meeting)," Commerzbank strategist Rainer Guntermann said, adding he expected tapering early next year.

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