* Weak French PMI data sends Bunds to a three-week high
* Rise limited as euro zone decline slows, led by Germany
* Overall growth fragile, may return to hurt periphery
By William James
LONDON, Jan 24 German bond prices rose to a
three-week high on Thursday after French business activity data
fell short of expectations and pointed to a recession in the
euro zone's second biggest economy.
Above-forecast German data stemmed the rise
in demand for low-risk assets, but the discrepancy will flag
concerns that the euro zone's recovery is vulnerable if only
Germany can generate growth. Those concerns were supported by
Spanish figures showing another record high unemployment rate.
The Bund future rose 25 ticks to 143.84, reversing
an early fall and smashing through the upper limit of a range
that had survived several tests since early January.
"It was only the French data that was weaker but we
triggered some stops on the way up and that's exaggerated the
move a bit," a trader said, citing automated buying around
recent highs of 143.64/67.
Technical analysts said a break out of this range could
propel the Bund higher if sustained into the close, with UBS
analyst Richard Adcock highlighting a move to 144.38 - the 62
percent retracement of the December to January sell-off.
The market's initial positioning for data showing an
improvement in the euro zone had also meant the focus on the
French weakness was greater, analysts said.
DIVERGENCE FROM FUNDAMENTALS
A string of heavily oversubscribed debt sales by peripheral
states over the last two weeks has reinforced confidence that
funding problems for the region weaker states have eased.
However, some market participants remain sceptical that the
demand is based on improving fundamentals, instead highlighting
the huge amount of cash made available by loose central bank
policy that needs to be put to work to generate returns.
"Historically, Bunds tend to get a kicking in the first
quarter as new money helps (weaker credits) outperform. After
February-March the real numbers start to kick in," the trader
Although the rate of decline in the euro zone private sector
slowed by more than expected, the growth that the region's
weaker economies like Spain and Italy need to turn around their
finances and start reducing debt remains some way off.
Nevertheless, Spanish 10-year bond yields were
6 basis points lower on the day at 5.02 percent, quickly
shrugging off an early rise on the back of the record
Investec analyst Elisabeth Afseth said that over the longer
term it would be hard to reconcile the enthusiasm for
lower-rated debt issued by peripheral states with the weak
"My concern is that there will be tensions further down the
line because of this," she said.
"Nobody is expecting to see this growth immediately, but
having said that, the continuing disappointing economic figures
aren't doing anyone any good."