* Weak German, French PMI data pushes Bunds out of range
* Italian yields edge up before election, investors cautious
* Spanish spread over Italy tightens
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.
Investors looking for signs that the euro zone was emerging
from recession were left disappointed by business activity data
showing the economic downturn in the region unexpectedly
worsened in February.
That helped to push Bund futures 91 ticks higher to
143.33, building on early gains made when equity markets in
Europe fell on U.S. Federal Reserve minutes showing its appetite
for bond-buying stimulus may be waning.
The Bund future breached the top of its recent trading range
and hit its highest since Jan. 25, with traders citing automated
buying at the Feb. 11 high of 143.11 after the purchasing
managers' index data. By midday, Bunds were trading at 143.13.
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 ... People decided here to pull the trigger and go
However, the impact on peripheral bonds was limited, with
Italian 10-year yields rising 6 basis points on
the day to 4.48 percent, but remaining well below peaks of 4.64
percent seen earlier this month.
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 most selling by investors
worried about the election outcome has been met by buyers who
have faith in the central bank backstop.
Spain cashed in on investors appetite for higher-yielding
peripheral bonds, raising an above-target 4.2 billion euros at
auction just a day after the country issued its first dollar
bond since 2009.
"That was a very good auction in pretty much every aspect
... It's been a long time since the big skew has been towards
the 10-year in distribution terms," said Marc Ostwald,
strategist at Monument Securities, referring to the large amount
of 10-year paper sold relative to less risky, shorter issues
also on offer.
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, leaving the spread between the two at its
narrowest since early November.
Ten-year Spanish yields were last flat on the
day at 5.20 percent, wiping out an early rise as markets
welcomed the auction result.
France shrugged off the disappointment of its weak PMI data,
producing a solid set of auctions that raised more than 10
billion euros. Ten-year French yields were
slightly lower on the day, down 3 bps at 2.26 percent.