* Weak German, French PMI data pushes Bunds out of range
* Italian yields edge up before election, investors cautious
* Spain to sell 4 bln of bonds, to benefit from Italy risks
By William James
LONDON, Feb 21 German Bund futures hit a
four-week high on Thursday after euro zone private sector
activity data came in weaker than expected, prompting investors
to flock towards low-risk assets.
Prospects of euro zone emerging from recession soon were
dealt a blow as surveys showed the downturn in the region's
businesses worsened unexpectedly this month -- especially in
Bund futures rose 91 ticks to 143.33, building on
early gains made when equity markets in Europe fell on signs the
U.S. Federal Reserve's appetite for bond-buying stimulus may be
With traders citing automated buying at the Feb. 11 high of
143.11 after the PMI data, the Bund future breached the top of
its recent trading range and hit its highest since Jan. 25.
Analysts said the cautious tone underlying markets in the
run-up to Italy's Feb. 24-25 election had made investors more
sensitive to weak data.
"Taking into account the recent momentum that has been
building up, the market is more prepared to look at the
downside, in the PMI data especially," said Christian Lenk,
strategist at DZ Bank.
"Investors are becoming more and more cautious ahead of the
weekend... and all together people decided here to pull the
trigger and go risk-off."
The risk of the Italian vote producing a fragmented
parliament with limited ability to pursue reforms has been
balanced by the market's belief that the European Central Bank
remains an effective buyer of last resort.
That has calmed nerves, ensuring any selling by investors in
worried about the election outcome has been met by buyers who
have faith in the central bank backstop.
Italian 10-year yields were 4.5 basis points
higher on the day at 4.47 percent, but still well below peaks of
4.64 percent seen earlier this month and far the 6 percent
barrier, breached last year, that prompted the ECB to make its
bond buying commitment.
Later in the day, Spain sells up to 4 billion euros of debt,
split across bonds maturing in 2015, 2019 and 2023. The sale is
expected to cash in on solid appetite for higher-yielding
peripheral bonds and comes a day after the country issued its
first dollar bond since 2009.
"With Italy's political risks still prevalent, we suspect
there will be some demand to switch into Spanish paper on a
tactical basis," said Credit Agricole strategist Peter Chatwell
in a note to clients.
Spanish bond yields have pulled back somewhat after rising
in early February when a political scandal brought calls for
Prime Minister Mariano Rajoy to resign. Since then, Spain has
outperformed Italy, narrowing the spread between their 10-year
bond yields by 18 bps.
Ten-year Spanish yields were slightly higher
on the day, up 4 basis points at 5.24 percent, with traders
citing the normal concession-building process, where dealers
sell before an auction to make room for the new paper.
France will also sell up to 10.5 billion euros of nominal
and inflation-linked bonds.