German Bunds turn flat after upbeat euro zone PMI

LONDON Mon Dec 16, 2013 7:51am 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, although investors were cautious ahead of this week's Federal Reserve rate meeting.

Bunds had risen 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 bloc's two largest economies.

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," said Nick Stamenkovic, bond strategist at RIA Capital Markets. "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."

German Bund futures were 1 tick higher at 140.26, with 10-year German yields steady at 1.83 percent. Yields were well within this month's 1.70-1.89 percent range as investors played it safe before the Federal Reserve's Dec. 17-18 meeting.

Ten-year French yields were flat at 2.24 percent, despite data suggesting the euro zone's second-biggest economy is slipping back into a shallow recession in the final quarter of the year. The yield gap versus Germany was near its narrowest since May at around 40 basis points.

"I am actually short France because I think it's way too tight against Germany," a second trader said.

Other euro zone debt was also range-bound before the Fed.

Even though the consensus is still for the U.S. central bank 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.

"After the strong data on the labour market, the market is expecting a wording of the Federal Reserve that is on the hawkish side in terms of reducing the amount of bonds that it is buying with quantitative easing programme," said Alessandro Giansanti, senior rates strategist at ING, pointing to the recent sell-off in the U.S. Treasury market.

Ten-year U.S. Treasury yields have risen more than 20 bps over the past two months.

Italian and Spanish bonds were up slightly with traders citing some buying in thin markets. Given how muted flows are, "even slightly better buying is enough to cause visible price action", one trader said.

Ten-year Spanish yields were 1.3 bps lower at 4.10 percent, while Italian yields were 2.7 bps lower at 4.07 percent.

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