January 6, 2014 / 4:50 PM / in 4 years

Patchy global services data push German Bunds higher

* Chinese, U.S. services data weaker than expected

* Some pockets of weakness in euro zone services sector

* Portugal is the sweet spot for recovery trades - analyst

By Ana Nicolaci da Costa and Marius Zaharia

LONDON, Jan 6 (Reuters) - German government bonds firmed on Monday as weaker than expected services activity data in the United States, China and parts of Europe gave investors a reason to buy safe-haven debt.

The pace of growth in the U.S. services sector unexpectedly slowed for a second straight month in December, with the ISM index dropping to 53 from 53.9 in November, much lower than a forecast in a Reuters poll for a rise to 54.5.

Services activity slowed sharply in China, while in the euro zone it accelerated on a regional level, but showed big economies such as Italy and France lagging.

German Bund futures closed the day 45 ticks higher at 139.54, while 10-year German cash yields fell 3.6 basis points to 1.91 percent.

“We saw some disappointing figures on the services sector, especially in the U.S.,” said Ralf Umlauf, an analyst at Helaba Landesbank Hessen-Thueringen.

He said, however, that while sounding a note of caution, the weaker services data should not shake widespread expectations that global growth will pick up this year.

Recent euro zone data has indeed shown signs of improvement. Manufacturing activity in Italy and Spain beat expectations in December, while the Spanish unemployment rate also dropped.

Spain has particularly stood out, with its service sector growing at its fastest pace in 6-1/2 years in December, according to the PMI survey.

“Despite the fact that we have Spanish supply coming this week, we would probably favour Spain to continue outperforming BTPs (Italian bonds) in the medium-term,” one trader said.

Ten-year Spanish yields were flat at 3.91 percent, and the Italian equivalent was steady at 3.93 percent. Madrid plans to raise up to 5 billion euros in a new five-year bond and a re-opened 14-year bond on Thursday in what could be its largest bond auction in almost a year.

The premium Spanish and Italian bonds offer over German Bunds fell below the 200 basis point mark for the first time since mid-2011 last week.

Portuguese bonds outperformed with 10-year yields falling 11 basis points to 5.59 percent.

“It is a very nice niche to play the recovery trade. For investors not concerned by its ratings, Portugal is a sweet spot,” said David Schnautz, rate strategist at Commerzbank.

Irish 10-year yields fell 2 bps to 3.36 percent as the debt agency announced plans to sell a new 10-year syndicated bond - Ireland’s first bond sale since exiting its EU/IMF bailout.

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