* Weak French PMI data sends Bunds to a three-week high
* Upbeat U.S. data prompts investors to take profit
* Hunt-for-yield trade prevails
By Ana Nicolaci da Costa and William James
LONDON, Jan 24 German Bund futures reversed a
rally and ended lower on Thursday as business surveys showing
tentative signs of strength in some major economies offset
pockets of weakness in euro zone data.
German bond prices rallied to three-week highs in early
trading as French business activity numbers fell short of
expectations. But above-forecast survey results for Germany's
private sector dented enthusiasm for the perceived safety of
Bunds and upbeat U.S. data reversed the trend.
U.S. factory activity grew the most in nearly two years in
January and the number of new claims for jobless benefits fell
to a five-year low last week.
"It has been a roller coaster ride here," David Schnautz,
interest rate strategist at Commerzbank said. "The leg lower (in
the Bund) mirrored pretty closely when the U.S. jobless claims
came in much lower than expected."
German Bund futures made a settlement close of
143.20, down 39 ticks on the day, having risen earlier as far as
144.07 - its highest in three weeks.
German private sector activity jumped to its highest level
in a year in January, while French data pointed to a possible
recession in the euro zone's second-biggest economy.
The data underlined the divergence among the region's
largest economies and that recovery is vulnerable if Germany is
the only source of growth. Spanish figures showed another record
high unemployment rate and a rising tide of bad bank loans.
Even so, ten-year Spanish government bond yields
were 5.1 basis points lower at 5.03 percent and
the Italian equivalent was 3.1 bps lower at 4.16
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's 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
strategist Patrick 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.
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
But for now, investors are reluctant to play against a
hunt-for-yield trade which has been mainly made possible by the
European Central Bank's pledge to support the bond markets of
struggling sovereigns that seek help.
Against that backdrop, Commerzbank's Schnautz recommends
buying Belgian bonds against those of other higher-rated
"What still seems to be working very well is our
recommendation of Belgium versus the better credits," he added.
"The hunt for yields is still going on... to have an overweight
on Belgium still seems to be one of the best risk-reward
Ten-year Belgian bonds yielded 2.22 percent,
compared with 2.17 percent offered by France's equivalent and
much higher than Germany's 1.51 percent.