* Weak French PMI data sends Bunds to a three-week high
* Rise limited as euro zone decline slows, led by Germany
* Overall growth fragile, fears 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 slowed the rise
in demand for low-risk assets, but diverging fortunes among the
region's largest economies raised concerns that the euro zone's
recovery is vulnerable if Germany is the only source of growth.
Those worries were supported by Spanish figures showing
another record high unemployment rate and a rising tide of bad
"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.
Others added that an increase in demand from central banks,
typically more cautious investors, had been supporting German
debt prices over recent sessions.
"They still have some concern on the euro zone from a
fundamental standpoint," said BNP Paribas strategist Patrick
The Bund future rose 48 ticks to 144.07, reversing
an early fall and smashing through the upper limit of a range
that had survived several tests since early January.
Technical analysts said a break out of this range could
propel the Bund even 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.
French bonds themselves were seemingly unaffected by the data,
with 10-year yield 2 basis points lower on the day at 2.11
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.
"The good news for peripherals relies on expectations - we
expect the election result in Italy will be market friendly, we
expect that Portugal and Spain will be in good condition, and
the situation in the euro zone will normalise," BNP Paribas'
Jacq said. "But this is only expectation. We need to see some
materialisation of that."
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
5 basis points lower on the day at 5.03 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."