* Short-dated yields rise to multi-month highs
* Size of bank repayment to ECB is bigger than forecast
* Markets bet on more aggressive liquidity withdrawal
* Two-year U.S. yields rise above U.S. counterparts
By Ana Nicolaci da Costa
LONDON, Jan 25 Two-year German bond yields hit
their highest since March 2012, rising above their U.S.
counterparts, after the ECB said banks would pay back a greater
than expected 137 billion euros in loans next week.
The repayment was higher than the 100 billion euros ($134
billion) forecast in a Reuters poll - a sign that at least parts
of the financial system are returning to health.
Short-dated debt led a rise in yields across maturities,
with German bond prices having already come under selling
pressure after stronger-than-expected data boosted optimism
about the outlook for the euro zone's largest economy.
Some analysts said the higher number was prompting markets
to price in a more aggressive repayment of the European Central
Bank funds, sapping the abundant liquidity that helped calm the
euro debt crisis in late 2011 and early 2012.
"Clearly this is putting some pressure on the front end of
the euro zone curve, given that the market is extrapolating this
larger repayment and taking the view that excess liquidity is
going to fall more quickly than initially expected," Michael
Leister, senior interest rate strategist at Commerzbank said.
The number was also bigger than their own forecast which was
for a repayment of between 75 and 100 billion euros, he said.
Two-year German bond yields rose 9 basis points
to 0.275 percent, overtaking the 0.26 percent offered by
two-year U.S. bonds.
Five-German yields rose 11 basis points to 0.67
percent - its highest since October 2012 - and 10-year yields
were 6.6 bps higher at 1.58 percent.
Spanish borrowing costs over 10 years were
down 9.3 bps at 4.93 percent and the Italian equivalent
shed 6.2 bps lower to 4.09 percent.
"I doubt there were many peripheral banks taking part in
that pay-back," Christian Lenk, strategist at DZ Bank.
"For the periphery, most of them should have taken the money
from the ECB to buy Italian and Spanish debt for carry and I
doubt they have an incentive to pay back the LTROs (long-term
refinancing operations) right now."
Carry refers to investors borrowing at the ECB cheaply to
put money in higher yielding bonds and make a profit.
German Bund futures extended losses to a session low after
the announcement, having already fallen after data confirmed a
rebound in the euro zone's largest economy.
Munich-based Ifo think tank said German business morale
improved for a third consecutive month in January to its highest
in more than half a year.
One day after upbeat private sector activity data, the
numbers fueled optimism over the euro zone's economic
powerhouse, prompting investors to dump safe-haven assets even
as data showed Britain's economy contracted more than expected
in the fourth quarter.
German Bund futures were last down 80 ticks on the
day at 142.40.
"In the very short term I would be bearish (on German
Bunds), but I would be wary of saying this is a turning point,"
Lenk added. "(Recent movements have been) erratic, which means
the market doesn't really have a strong opinion about what's
One trader shared a similar view, expecting Bunds to remain
stuck in a 142-144 range held throughout most of January, with
investors uncertain on how to play the market.
"I don't see what's going to break it (the range) at the
moment because there just isn't any consensus on what to do,"
the trader said. "We are not seeing huge trades going on from
clients because they generally don't know what the next big move