September 16, 2013 / 7:31 AM / 4 years ago

Euro zone bonds rise after Summers drops Fed candidacy

* Bonds rally with U.S. Treasuries after Summers withdrawal

* Summers perceived as less committed to ultra-easy policy

* Lower-rated euro zone debt also benefit

By Emelia Sithole-Matarise

LONDON, Sept 16 (Reuters) - Euro zone bond prices rose across the board on Monday after Lawrence Summers, widely seen by financial markets as less committed to ultra-loose monetary policy, withdrew from the race to head the U.S. Federal Reserve.

Top-rated Bunds led the charge, tracking U.S. Treasuries as investors bet the Fed would now take a more gradual approach to reining in its programme of support for the economy than it would have under Summers.

The other leading candidate to head the central bank, Fed deputy chief Janet Yellen, is seen by markets as likely to be more supportive of existing policy and less likely to scale bond purchases back quicker.

“Yellen presumably is now the favourite and that will set the tone. She has always been viewed as a far more dovish choice so that’s the focus,” a trader said.

The Bund future was last 49 ticks up at 138.48 with German 10-year yields down 3.5 basis points lower at 1.89 percent. U.S. Treasuries outpaced their German counterparts, squeezing the 10-year T-note yield premium over Bunds by 5 bps to 87 bps.

German 10-year yields have pulled further away from a 1-1/2-year high of 2.059 percent hit on Sept. 6, as mixed U.S. economic data clouded the outlook on how fast the Fed would scale back its monetary stimulus.

Summers’ decision comes just before the Fed meets this week to decide when and by how much to trim its asset purchases from the current pace of $85 billion a month.

Some in the market saw limited gains for top-rated bonds before the bank’s decision on Wednesday.

“We continue to see support for the Bund with yields above 2 percent, while yields below 1.9 percent appear expensive amidst the tapering (of bond-buying) anxiety,” Commerzbank strategists said in a note.

“We prefer to keep duration exposure limited as Wednesday’s FOMC decision looks set to produce knee-jerk volatility.”

At the other end of the credit spectrum, Italian and Spanish 10-year yields were down 4 basis points at 4.53 percent and 4.46 percent respectively.

Portuguese yields were also slightly lower but lagged the rest of the market as investors fretted about Lisbon’s relationship with its international backers after the head of the Eurogroup of euro zone finance ministers rejected any softening of the fiscal targets in its bailout deal.

Wrangling over the degree of austerity that Portugal should implement almost led to a government collapse in July triggered by new Deputy Prime Minister Paulo Portas.

Portas said last week he wanted to see an easing of budget deficit goals and for the first time will oversee talks with European Union and International Monetary Fund officials, who start a review of the bailout on Monday.

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