April 10, 2012 / 10:45 AM / 8 years ago

EURO GOVT-Bund yields hit 6-mth lows; Spain, Italy pressured

* Bund yields hit 6-mth lows after weak U.S. jobs data
    * Break to new lows seen possible in near term
    * Spanish/Italian bond selloff continues

    LONDON, April 10 (Reuters) - German Bund yields hit their
lowest level since September on Tuesday after Friday's weak U.S.
employment report added to growth concerns in the euro zone,
with Spain taking centre stage in the region's debt crisis.	
    Signs of a global slowdown would further pressure peripheral
debt issuers battling with dwindling growth in the face of harsh
austerity measures. As European markets reopened after the
Easter break, Italian and Spanish bond yields continued their
march higher after sentiment towards the two countries soured
following a weak Spanish bond sale last week. 	
    The key U.S. employment report, which pushed long Treasury
yields to four-week lows on Friday, showed payrolls grew by just
120,000 in March, far below expectations..	
    "Given the flight to quality, negative sentiment towards
Spain and Italy and now doubts about the U.S. clearly playing
into the risk-off environment, you can't rule out a test of 1.65
percent in 10-year German yields in the short term," said Nick
Stamenkovic, rate strategist at RIA Capital Markets. 	
    Safe-haven Bunds have been caught between the conflicting
forces of the euro zone debt crisis and signs of U.S. economic
recovery that weighed on Treasury markets. But after Friday's
data there was little resistance to a sharp move higher. 	
    June Bund futures were last 62 ticks higher at
139.77, less than a point off March's all-time highs of 140.52.	
    Ten-year yields hit their lowest levels in
more than six months at 1.665 percent, and were last 4 basis
points lower at 1.688 percent, within spitting distance of
September's all-time low of 1.637 percent.	
    Even so, U.S. Treasuries have outperformed
since the payrolls data was released with the yield gap over
Bunds narrowing by around 10 bps to 35 bps since Friday. 	
    Demand for Bunds with yields so low will be tested on
Wednesday with the launch of a new benchmark July 2022 bond
paying a coupon of just 1.75 percent, the lowest to date. 	
    "It may be that the limited return and it being a new bond
means that investors may want to wait to get involved," said
Credit Agricole rate strategist Orlando Green. 	
    "But the environment does suggest there'll still be a decent
amount of demand."	
    	
    MORE PAIN FOR SPAIN, ITALY 	
    Italian bonds were under pressure ahead of a 5 billion euro
BTP auction on Thursday after last week's
disappointing Spanish sale, with 10-year yields 16
basis points higher at 5.60 percent, and shorter-dated paper
underperforming.	
    "After the Spanish supply last week, and with Italian supply
this week, I just don't think anyone is prepared to stand in the
way of these moves," a trader said. 	
    "Nothing has fundamentally changed, at least with respect to
Italy, but I'm less impressed with the dynamics of Spain's
economy." 	
    Analysts see Italy as vulnerable to Spain's problems as the
latter finds itself at the centre of the euro zone debt crisis
on concerns about its ability to meet budget targets while
facing recession and rising unemployment. 	
    Spanish 10-year yields were 17 basis points
higher at 5.95 percent after rising around 25 basis points last
week. The spread over Bunds is at its highest since early
December, before the European Central Bank flooded banks with
cheap three-year liquidity.	
    "The (three-year ECB tender) was supposed to be the game
changer but the stimulus it may have provided looks like it has
worn off - save for perhaps helping to sustain the banking
sector a little longer," said Societe Generale credit strategist
Suki Mann, adding that the selling pressure had spread to bonds
issued by corporates in peripheral euro zone countries. 	
    Bank of America Merrill Lynch technical analysts set a
target of 6.51 percent for Spanish 10-year yields with the
possibility of a move to November's highs of 6.83 percent. 	
    Traders said market flows were thin after the Easter break,
however, with much of the movement on peripheral debt down to
prices being marked wider. They added there was no sign of the
ECB intervening in secondary markets after the central bank's
asset purchase programme has been all but frozen since
mid-February. 	
    "The question is, where is the ECB?" the trader said. "Has
the bond purchasing programme finished? Is it on hold? Nobody
knows." 	
    Also benefiting from demand for core paper, Austria sold 1.2
billion euros of 5- and 10-year government bonds on Tuesday and
the Netherlands 3 billion euros of 5-year bonds.
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