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EURO GOVT-Investors scoop up Bunds after strong sell-off
January 7, 2013 / 12:15 PM / 5 years ago

EURO GOVT-Investors scoop up Bunds after strong sell-off

* Bunds rebound after last week’s big sell-off

* Further falls seen likely on improved U.S. outlook

* Euro zone data, ECB may be next market movers

By Marius Zaharia

LONDON, Jan 7 (Reuters) - Investors snapped up German Bunds on Monday, after the euro zone’s lowest-risk debt plunged to one-month lows last week, even though further falls were expected after a raft of forecast-beating U.S. data.

Figures on Friday showing the U.S. services sector grew in December at its fastest pace in 10 months, and a slightly better than expected jobs report, added momentum to a sell-off in German debt sparked by a last-minute budget deal to avert a U.S. fiscal crisis.

Bund futures fell by almost three points last week to their lowest in a month at 142.52. On Monday, at the start of the first full week of trading of 2013, they rebounded and were last 30 ticks higher at 143.05.

“We’re now entering a period of consolidation, but the momentum still seems to be with the bears after what we’ve seen in the U.S.,” one trader said, referring to investors who expect Bunds to fall further.

Analysts said Bunds could fall further in the near term as the improved U.S. outlook and the relative calm in the euro zone provide a favourable environment for yield hunting.

“There’s an overall tendency to say goodbye to safe-haven assets and pick up yield somewhere. If you just keep on holding your safe-haven assets you will somehow bleed to death,” said DZ Bank rate strategist Christian Lenk.

“Even if you don’t see very positive news in the next few weeks I could well imagine we will see lower levels in the Bund and a return to yield levels where we’ve seen resistance in the past ... the 1.60-1.70 percent area is crucial.”

Risks to that scenario stemmed from a potentially bitter Italian election campaign and knife-edge debates about lifting the U.S. debt ceiling, he said.

Cash 10-year German yields were last 2 basis points lower at 1.525 percent. Significantly, they broke above 1.46 percent last week -- a level they repeatedly failed to break in November and December -- signalling yields were likely to rise further.

CAUTION

The slight rebound may also reflect caution before a spate of euro zone data and a European Central Bank rate-setting meeting later this week, at which the bank is seen holding fire and may back away from the easing signals sent last month.

This week’s euro zone releases include unemployment, retail sales and some business sentiment indicators.

“A lot of the sell-off was led by the United States last week. To see further falls in Bunds you need some positive news in the euro zone as well,” Rabobank rate strategist Lyn Graham-Taylor said.

“The ECB could be relatively neutral, not changing the deposit rate nor the refi rate and not doing anything else that’s special.”

UBS technical analyst Richard Adcock said despite the bounce, the “market can pull back further to test the Oct. 18 low at 141.14.” He suggested a 141.20 target on Bunds, with stops placed at 143.80, just above the 38 percent retracement of last week’s sell-off.

Other euro zone government bond yields were also relatively steady on Monday.

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