German Bunds steady after Fed stimulus cut, rates signal

Thu Dec 19, 2013 4:00am EST

Related Topics

* Bunds, lower rated bonds flat as Fed says will trim stimulus

* Fed's rate guidance offsets decision on bond purchases

* Some analysts see Bund, Treasury yields rising near-term

* Moves to be data-dependent, probably not to occur before 2014

By Marius Zaharia

LONDON, Dec 19 (Reuters) - German Bunds held steady on Thursday after the Federal Reserve offset a decision to reduce its bond-buying programme by promising to keep interest rates low for longer than many investors had expected.

Fed Chairman Ben Bernanke said the U.S. central bank would reduce monthly asset purchases by $10 billion to $75 billion and that it may continue to cut them back steadily, suggesting that quantitative easing could end by around the end of 2014.

But he also said the Fed will probably keep the federal funds rate at zero to 0.25 percent well past the time that the U.S. unemployment rate falls below 6.5 percent, especially if inflation remains below 2 percent.

The U.S. central bank's stimulus programme has given substantial support to financial markets and the gradual withdrawal of it is expected to lift core yields off historical lows.

The Fed's comments on its key rate outlook meant market rates did not rise sharply, a move which could have posed risks to the U.S. and global economic recovery, analysts said.

Bund futures were last flat at 140.14, while 10-year German yields were unchanged at 1.845 percent, comfortably below this year's highs of over 2 percent. U.S. 10-year T-note yields were also flat at 2.8867, erasing an initial rise on the Fed's announcement.

"The dovish comments on the rate guidance reduced (upward) pressure on yields," said Alessandro Giansanti, senior rate strategist at ING in Amsterdam. " But if the recovery continues at the current pace we are going to see higher yields."

DATA-DEPENDENT

Giansanti expected U.S. 10-year yields to hit 3 percent in the next three months and Bund yields to test 2 percent. The premium U.S. T-notes offer over Bunds, currently at roughly 100 bps, should rise to 120 bps, he said, arguing the U.S. economy will recover faster than Europe while the European Central Bank will stick to its soft monetary policy stance.

Investors will wait for new evidence the recovery is picking up before further trimming their bond portfolios, he said.

"Future data releases, especially the (U.S.) payrolls numbers, will continue to be a big source of volatility," said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki.

One trader said investors would probably prefer equities over Bunds and Treasuries, but the shift in allocations was probably going to occur at the start of 2014, with many having already closed their books for this year.

Lower-rated euro zone bonds also held their ground.

Italian 10-year yields were flat at 4.08 percent, a touch above recently hit six-month lows, while equivalent Spanish yields rose 1 bp to 4.17 percent before Madrid's last debt auction of the year.

Spain plans to sell 1.5-2.5 billion euros in 2018 and 2023 bonds, having reached its funding target for this year with a strongly-bid auction earlier this month.

"Spain continues to trade well, thanks to better incoming data, stable rating outlook and improving market confidence. We expect Spain to outperform core and peripheral (bonds) over the coming months," Citi strategists said in a note.

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