* Bonds rally with U.S. Treasuries after Summers withdrawal
* Summers perceived as less committed to ultra-easy policy
* Lower-rated euro zone debt also benefit
By Emelia Sithole-Matarise
LONDON, Sept 16 Euro zone bond prices rose
across the board on Monday after Lawrence Summers, widely seen
by financial markets as less committed to ultra-loose monetary
policy, withdrew from the race to head the U.S. Federal Reserve.
Top-rated Bunds led the charge, tracking U.S. Treasuries as
investors bet the Fed would now take a more gradual approach to
reining in its programme of support for the economy than it
would have under Summers.
The other leading candidate to head the central bank, Fed
deputy chief Janet Yellen, is seen by markets as likely to be
more supportive of existing policy and less likely to scale bond
purchases back quicker.
"Yellen presumably is now the favourite and that will set
the tone. She has always been viewed as a far more dovish choice
so that's the focus," a trader said.
The Bund future was last 49 ticks up at 138.48 with
German 10-year yields down 3.5 basis points lower
at 1.89 percent. U.S. Treasuries outpaced their German
counterparts, squeezing the 10-year T-note yield premium over
Bunds by 5 bps to 87 bps.
German 10-year yields have pulled further away from a
1-1/2-year high of 2.059 percent hit on Sept. 6, as mixed U.S.
economic data clouded the outlook on how fast the Fed would
scale back its monetary stimulus.
Summers' decision comes just before the Fed meets this week
to decide when and by how much to trim its asset purchases from
the current pace of $85 billion a month.
Some in the market saw limited gains for top-rated bonds
before the bank's decision on Wednesday.
"We continue to see support for the Bund with yields above 2
percent, while yields below 1.9 percent appear expensive amidst
the tapering (of bond-buying) anxiety," Commerzbank strategists
said in a note.
"We prefer to keep duration exposure limited as Wednesday's
FOMC decision looks set to produce knee-jerk volatility."
At the other end of the credit spectrum, Italian and Spanish
10-year yields were down 4 basis points at 4.53 percent
and 4.46 percent respectively.
Portuguese yields were also slightly lower but
lagged the rest of the market as investors fretted about
Lisbon's relationship with its international backers after the
head of the Eurogroup of euro zone finance ministers rejected
any softening of the fiscal targets in its bailout deal.
Wrangling over the degree of austerity that Portugal should
implement almost led to a government collapse in July triggered
by new Deputy Prime Minister Paulo Portas.
Portas said last week he wanted to see an easing of budget
deficit goals and for the first time will oversee talks with
European Union and International Monetary Fund officials, who
start a review of the bailout on Monday.