* Bunds rise but expected to remain in recent ranges
* A strong ECB repayment number could impact short-end
* Investors look to Ifo for further sign of German recovery
By Ana Nicolaci da Costa
LONDON, Jan 25 German Bunds rose on Friday but
kept within recent ranges as traders expected mixed data out of
Europe and only a limited impact from the European Central
Bank's loan repayment announcement.
Britain's economy is expected to have contracted 0.1 percent
in the fourth quarter of last year, according to a Reuters poll,
while Germany's Ifo index, a key barometer of the country's
economic health, is seen rising for a third month in January.
The ECB will also announce this session how much banks plan
to repay of the 489 billion euros they borrowed from it in the
first round of cheap long-term financing in December 2011.
Although Italian and Spanish bonds are expected to withstand
any withdrawal from the banking system next week, the repayment
could impact money markets and two-year German yields, which are
more sensitive to interest rate expectations.
Two-year German yields were little changed at
0.18 percent, while 10-year yields were 1.2 basis
points lower at 1.50 percent.
"If you start with a strong number from the beginning,
expectation will mount that more banks will come later,"
Alessandro Giansanti, senior rate strategist at ING, said.
Traders expect 100 billion euros will be returned to the ECB
next week, according to a Reuters poll but forecasts ranged from
30 billion to 250 billion euros..
A number above 200 billion euros could lead to further
repricing of interest rate expectations as markets interpret a
reduction in liquidity as the first step towards a more hawkish
or tighter monetary policy, he said.
"There is still a possibility for a further rise of
overnight Eonia (rates) if the market starts to think we will
have consistent shrinkage in the excess liquidity ... If the
market expects liquidity will go down, you will have pressures
on two-year German bonds as well," Giansanti added.
Eonia rates last stood at 0.068 percent.
BACK TO BASICS
Markets were braced for an upbeat German sentiment number
after the Mannheim-based ZEW think tank said earlier this week
its monthly poll of economic sentiment climbed for a second
month in January to its highest level since May 2010.
A stronger-than-expected number could weigh on Bunds which
were rebounding after a sell-off in the previous session,
One day after upbeat German private sector activity data,
such a number would also reinforce the view that the euro zone's
largest economy is serving as a beacon of growth in a region
still struggling with the fallout of the debt crisis.
"The risk is Ifo is on the strong side after ZEW was strong
- that's probably the way we are going into it," one trader
said. "That's in the price to a degree as well.
"At the end of the day markets are in somewhat of a range
and I don't see any reason why we are going to break out today,"
he said, pointing out that Bunds had traded within a 142-144
range for most of January.
Despite the rise in German bond prices, peripheral bonds
were also higher. Ten-year Spanish bond yields
were down 3.5 basis points at 4.99 percent and the Italian
equivalent was 2.8 bps lower at 4.12 percent.