* Lower-than-expected ECB repayment weighs on 2-yr yields
* Payrolls data eyed for clues on Fed policy direction
* Feb. 22 ECB repayments next landmark for money market
By Marius Zaharia and William James
LONDON, Feb 1 Yields on short-term German bonds
fell on Friday after the ECB said banks will repay only a small
amount of emergency three-year loans next week, while
longer-term yields had a choppy session after mixed U.S. data.
Banks will pay back 3.5 billion euros of loans taken late in
2011 when the European Central Bank flushed the market with
long-term loans to prevent a credit crunch.
The number, well below a median forecast of 20 billion euros
in a Reuters poll, prompted some to trim their projections on
how fast excess liquidity will drain out of the banking system
and, as a result, how quickly money market rates will rise.
That spilled over into the short end of the German curve
where two-year yields fell 2 basis points to 0.24
percent, erasing some of the 11 basis point rise seen since last
week's first wave of repayments came in higher than expected.
"That figure curbed some of the recent excitement," one
trader said. "People now think the short-end (yield) went too
far and they are back buying."
In the United States, a closely-watched U.S. non-farm
payrolls report suggested that the jobs market was healing, but
only at a subdued pace that is unlikely to make the Federal
Reserve pull away from its stimulus policy.
Bund futures rose as high as 142.45 after the jobs
report, but fell later after data showed the manufacturing
sector growing faster than expected in January. They last traded
at 142.03, up 13 ticks on day.
Cash 10-year German yields were 1 bps lower at
"The market is now realising that the U.S. is having
moderate growth, but nothing that will dissuade the Fed from
staying on course with its policy," Mizuho strategist Ricardo
"I would expect to see a consolidation ... at 1.70 percent
in yield I am comfortable buying back a little bit of 10-year
Banks can repay their long-term loans to the ECB every week
and short-term German bonds are likely to be highly sensitive to
The announcement due on Feb. 22 is most keenly awaited, as
that figure will include repayments from the second batch of
long-term ECB loans taken last February and was expected to
drain another large lump sum of cash from the banking system.
"Markets were very unsure what they had to expect from these
weekly repayments after the first one. The reactions will be
erratic now from week to week," said Piet Lammens, strategist at
In the lower-rated euro zone countries yields were slightly
higher, with the Spanish and Italian
10-years rising 3 bps to 5.22 percent and 4.33
A six-month-old rally has stalled in recent days, with
investors getting more cautious ahead of Italian elections later
this month. The vote could result in a fragmented parliament
that could weaken the government's ability to implement reforms
needed to boost growth and cut debt.
"In my recommendations portfolio I am still overweight the
periphery, but have reduced it a little because we've rallied a
lot and we have Italian elections coming up," Mizuho's Barbieri