By Ana Nicolaci da Costa and Marius Zaharia
LONDON, Sept 20 German bond yields rose on
Friday after a Federal Reserve official said the central bank
could still curb stimulus in October, making investors
increasingly uncertain about the timing of any tapering.
St. Louis Fed President James Bullard's comments gave
investors a window of opportunity to cash in on hefty gains made
in the previous session after the Fed surprised markets by
keeping its asset-purchasing program intact.
Against this backdrop, analysts expected trade to remain
choppy as investors try to preempt the Fed's future action based
on the incoming data. In a sign of investor uncertainty, German
bonds fell but fellow safe-haven U.S. Treasuries were largely
unchanged on the day.
"Tapering is back on the agenda," one trader said. "I think
people generally don't know what to do now. Central banks ...
change their message everyday and therefore how can you justify
having a position?"
Ten-year German yields were 2.3 basis points
higher at 1.90 percent and German Bund futures were 24
ticks lower at 138.32.
The 10-year yield spread between U.S. Treasuries
and German Bunds were 2 bps narrower at 79 bps.
"At least, as far as the Treasury market is concerned, the
market is now more in line with what the Fed has as a
guidance...," Alessandro Tentori, global head of rates strategy
at Citi said.
"Still, when it comes to the euro zone, I guess we need to
wait for some data and see whether this uptick in sentiment data
we've seen in the past couple of months is really confirmed by
Consumer morale in the euro zone improved to a two-year high
in September, the European Commission said on Friday, with
confidence in the wider European Union surpassing its long-term
average for the first time since the summer of 2011.
Greek government bonds outperformed other periphery issues,
with ten-year Greek yields 19 bps lower at 10
percent benefiting from the first quarterly drop in almost four
years in Greece's unemployment rate.
"Greek bonds are rallying because of a combination of
things: first, the (lack of) Fed tapering; second, more good
data; and only third, the absence of any nasties in the German
election campaign," said Gabriel Sterne, an economist at
distressed debt brokerage Exotix.
Chancellor Angela Merkel looked on track to win a third term
in a weekend election in Germany but faced a battle to preserve
her centre-right majority and avert a potentially divisive
coalition with her arch-rivals, the centre-left Social Democrats
Funding gaps facing Athens and the risk Portugal may not
return to markets when its bailout runs out next year will be
among European policy challenges for Germany's next government.
Investors did not expect the election results to have a
major impact on the debt markets.
But, at the margin, they said a scenario where Merkel forms
a grand coalition with the Social Democrats, seen as more open
to European integration and liability-sharing than she is, would
be supportive for periphery and hurtful for safe-haven Bunds.
Other periphery prices were range-bound, with Italian yields
flat at 4.29 percent and Spanish yields
2 basis points lower at 4.31 percent.