* Bunds ease in light trading, awaiting ECB and U.S. data
* LTRO repayments to fuel selloff if higher than expected
* Payrolls data eyed for clues on Fed policy direction
By William James
LONDON, Feb 1 (Reuters) - German Bund futures fell on Friday as markets resumed a shift away from assets used as a hedge against economic weakness and financial stress, but trading was light ahead of a batch of U.S. and European data.
Bund futures fell 15 ticks to 141.75, unwinding modest gains made in the previous session when regular month-end buying offered some respite from the worst month for German debt since June last year.
Further losses were expected if the European Central Bank reveals later in the session that banks will repay another large chunk of the three-year emergency loans it used to shore up the financial system just over a year ago.
Bunds fell last week when the first wave of repayments came in above expectations and traders expect another 20 billion euros’ worth to be announced at 1100 GMT.
“The risk is that it comes in strong again and the Bund doesn’t like it because people decide, rightly or wrongly, that that’s a risk-on signal,” a trader said.
The effect of the repayments on German debt is two-fold: long-term bonds suffer because it is taken as a sign of banking strength while short-dated debt is hit by expectations of higher rates in the money market as the current cash surplus dwindles.
German two-year bond yields were 0.5 basis points higher on the day at 0.27 percent having risen by more than 11 basis points since the first wave of repayments.
ING strategists see two-year bond yields rising close to 75 bps by year end, driving a flattening across the German curve.
The focus will then switch to U.S. non-farm payrolls data, a key indicator on the health of the world’s largest economy, made even more pertinent after other recent numbers sent mixed signals.
The data, due at 1330 GMT, is forecast to show 160,000 jobs were added in January - a number that analysts say would be sufficient to sustain belief that the U.S. economy is still improving.
The payrolls report typically spurs short-term volatility in U.S. Treasuries that spills over to German debt, but a more lasting effect is only seen if the number comes in way in excess of expectations.
The U.S. Federal Reserve has linked monetary policy to the performance of the labour market, meaning any sign that strength was growing would generate speculation that its asset purchase programs could end sooner than thought.
“You could argue that if it’s above 200k or closer to 200k than expected you could see a bit of a selloff... you’d still need to see that for a few more months but there’d be a reaction,” Rabobank strategist Lyn Graham-Taylor said.