* Bunds rise after hitting support on Friday
* Rise seen fleeting as technical picture bearish
* German yields seen creeping higher before Wednesday's sale
* Euro zone data reinforces correction of recent trend
By Ana Nicolaci da Costa
LONDON, Jan 14 Bund futures rose on Monday after
the contract tested key support on Friday but, given a bearish
technical backdrop, analysts expected only a temporary rebound
before this week's German auction.
An unexpected fall in euro zone factory output gave
investors further reason to buy into safe-haven German debt
which has seen a yield pick-up since the start of 2013, and to
take profit on last week's rally in Spanish and Italian bonds.
"Since the beginning of the year, we had a significant
sell-off (in Bund futures) and there was a bit of a retracement
of that and it was compounded by the industrial production
numbers being weaker than expected," Ricardo Barbieri,
strategist at Mizuho said.
Industrial production in the region sharing the euro fell
0.3 percent in November from the previous month, against a
forecast for a 0.1 percent rise - in the latest sign of the euro
zone's economic challenges.
German Bund futures were 47 ticks higher at 142.79,
having fallen to 142.05 - their lowest in six weeks - on Friday.
Ten-year German yields were 4.2 basis points
lower at 1.55 percent but could rise to 1.7 percent by the
middle of the week as investors prepare for an auction of
10-year German paper, Rainer Guntermann, strategist at
Germany sells 5 billion euros of debt maturing in February
2023 on Wednesday - a sale expected to benefit from the recent
rise in yield which makes the returns on the bond more enticing.
An auction of new five-year German bonds last week saw healthy
demand for that reason.
"With the 10-year auction coming up out of Germany, there is
a technical argument that yields should jump a bit higher with
the new benchmark," Guntermann added.
Technical analysts said the contract was rebounding after
testing key support levels on Friday but that the technical
picture still pointed to further room for declines.
"We hit a big support on Friday which was a price gap that
we left behind from late October on the March contract as well
as a Fibonacci projection support - that's 142.09-141.95 - so we
think near-term the momentum has turned a little higher," David
Sneddon, technical analyst, at Credit Suisse said.
"Our bias though would still be to view strength as
corrective for the time being. We still think the broader risk
is lower still."
Spanish and Italian government bonds came under some selling
pressure as market participants took profit after strong rallies
on the back of healthy auctions last week.
Ten-year Spanish government bond yields were
up 9 bps at 4.98 percent and the Italian equivalent
rose 4 bps to 4.16 percent after falling to their
lowest in more than two years in the previous trading session.
Italy will attempt to sell 15-year debt this week for the
first time in more than two year, according to the Treasury, and
one trader said this would be adding further supply pressure on
Both countries' borrowing costs have dropped markedly since
European Central Bank President Mario Draghi promised to buy
bonds of struggling euro zone sovereigns that ask for help, but
analysts say the "normalization" of those markets was precarious
because it was based more on expectations than fundamentals.
"What we know in the near term is that we are going to have
an election in Italy in February and we are still waiting for a
Spanish request of some financial support from the euro zone,
(making) Spain eligible for the OMT (Outright Monetary
Transaction)," Patrick Jacq, European rate strategist at BNP
"As long as we don't have the outcome of both events, I
think the potential now for these countries to outperform
further is more limited."
After a successful start to Spain's hefty 2013 funding
programme, investors will scrutinize an auction on Thursday to
see whether Madrid can maintain the momentum of front-loading
issuance and avoid a sovereign bailout this year.