* U.S. earnings, French bank downgrades underpin Bunds
* Data on U.S. growth due later in the day
* Bunds seen sticking to recent tight ranges
* Tentative signs of normalization - but for how long?
By Ana Nicolaci da Costa
LONDON, Oct 26 Bund futures rose on Friday as
lacklustre corporate earnings, downgrades to French banks'
ratings and record unemployment in Spain highlighted the
challenges still facing the global economy.
Results from global giants Apple and Amazon
undershot expectations overnight, while in Europe,
Renault, Saint Gobain, Gucci and
Publicis weighed in with gloomy earnings and outlooks,
putting downward pressure on European stocks.
Standard & Poor's cut the rating of French banks including
BNP Paribas - a stark reminder of the problems still
facing the euro zone's second largest economy - but French
yields showed little reaction.
The bout of negative news whet appetite for safe-haven Bunds
but they were seen trading within recent tight ranges ahead of
U.S. third quarter gross domestic product data later in the day.
German Bund futures rose 31 ticks to 140.70.
"The current tight range is limited on the upside by 140.71
and the low we have set is at about 139.45," Piet Lammens,
strategist at KBC said, referring to last week's low.
U.S. growth is expected to have picked up to an annualised
1.9 percent from 1.3 percent in the previous quarter, according
to a Reuters poll.
But even such a rise would not be considered enough to make
much of a dent in unemployment, leaving in place doubts about
the economy that have underpinned safe haven bonds and kept the
Federal Reserve buying Treasuries.
Ten-year German bond yields were down 2.8
basis points at 1.55 percent. They rose as far as 1.625 percent
in the previous session but met buyers above 1.60 percent.
French borrowing costs over ten years were
flat at 2.15 percent.
HOUSE OF CARDS?
Promises of European Central Bank support, should a country
like Spain ask for aid, has been a key factor keeping sovereign
debt of both triple-A rated and lower-rated issuers in tight
Investors have been reluctant to make big bets, for fear of
being caught off guard should Spain seek help and trigger the
ECB's bond-buying program.
This prospect has also contributed to tentative signs of
normalization in sovereign debt markets.
The funding costs of both Spain and Italy have come down
sharply, and data from the European Central Bank on Thursday
showed consumers and firms put money back into Spanish and Greek
banks in September. There are budding signs that foreign
investors are venturing back to the Spanish sovereign debt
As one trader this week put it, the market is "healing":
"Liquidity is coming back, liquidity meaning the market can
digest larger customer repositioning and flows again," he said.
But Spanish 10-year yields were higher on
Friday, rising 6.3 basis points to 5.69 percent as data showed
one in four Spanish workers were without a job in the third
quarter of this year.
The data highlights the extent to which the recent
improvement in Spanish debt markets is based on expectations
rather than fundamentals and reality. The grim reality is that
Spain for some time to come will remain firmly in the grip of a
recession which has undermined its efforts to stabilise public
"That we've seen a little bit of improvement is really built
on the assumption, on the expectation that there will be an aid
request, that the ECB will start buying bonds and the ESM (euro
zone rescue fund) will start buying bonds in the primary
market," Elwin de Groot, senior market economist at Rabobank
"But it's all in the assumption that it will happen and if
there is a risk that it won't happen, then you could easily see
the vicious circle return in the market and that's the risk."