German yields rise after Fed taper, but guidance takes edge off
* Highly-rated debt tracks U.S. bonds lower one day after Fed verdict
* More dovish Fed rate guidance offsets tapering of bond purchases
* Periphery bonds brave tapering announcement
By Ana Nicolaci da Costa and Marius Zaharia
LONDON, Dec 19 (Reuters) - German yields held near seven-week highs on Thursday, a day after the Federal Reserve said it would trim asset purchases but tempered the move with a promise to keep interest rates low for longer than previously signalled.
Fed Chairman Ben Bernanke said the U.S. central bank would reduce its monthly asset purchases by $10 billion to $75 billion and was likely to continue to cut them back steadily, suggesting its huge dose of quantitative easing could end by late 2014.
He also said the Fed would probably keep the federal funds rate at between zero and 0.25 percent well past the point at which the U.S. unemployment rate falls past its 6.5 percent target, especially if inflation remains below 2 percent.
"I don't think (German yields) will go much higher. It was clearly dovish guidance and it should be enough (to limit the sell-off)," Commerzbank analyst Kevin Rettberg said.
Ten-year German yields rose 2.5 basis points to 1.87 percent - close to a seven-week high of 1.89 percent touched earlier this month - while the Bund future fell 34 ticks to a settlement close of 139.80.
German bonds tracked falls in the U.S. Treasury market . The U.S. central bank's stimulus programme has helped prop up global financial markets during the recent crisis and its gradual withdrawal is expected to lift core bond yields off historical lows in time.
"Tapering is the beginning of the end for loose monetary policy and yields will rise - if not today, maybe in the next few weeks or months," said Felix Herrmann, market strategist at DZ Bank in Frankfurt.
ING strategist Alessandro Giansanti expected U.S. 10-year yields, currently at 2.93 percent, 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 106 bps, should rise to 120 bps, he said, arguing that the U.S. economy will recover faster than Europe's and that the European Central Bank will keep monetary policy soft.
Investors will wait for new evidence the recovery is picking up before further trimming bond holdings, Giansanti said.
After a recent series of upbeat data, the latest releases were more tame, showing U.S. home resales hit a near-one-year low in November and new filings for unemployment benefits unexpectedly rose last week.
"The outlook for bond yields would be data-dependent," Investec chief economist Philip Shaw said. "If it turns out - like we believe - that momentum is building in the economy, that will result in higher yields."
Lower-rated bonds withstood the Fed's announcement of stimulus reduction particularly well, with 10-year Italian yields flat at 4.08 percent. Equivalent Spanish yields fell 2.3 bps to 4.13 percent as the country's bonds outperformed following strong results at Madrid's last debt auction of the year.
"The periphery got away lightly from what went on," said David Keeble, global head of fixed income strategy at Credit Agricole. "The Fed started tapering - there was a little bit of concern that you could have seen some risk-off type of trade which never showed up."
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