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EURO GOVT-Bunds pulled lower by gilts, Treasuries

Kirsten Donovan
Thursday, 25 Oct 2012 | 8:44 AM ET

* Bunds slip, pulled down by gilts, Treasuries

* Spanish impasse limits moves

* Opinion divided on next move for Bunds

LONDON, Oct 25 (Reuters) - German government bonds slipped on Thursday, pulled down by falls in UK gilts on signs of economic recovery and in U.S. Treasuries after the Federal Reserve held course on monetary policy.

Investors had not expected the Fed to change tack, but some Treasury investors took profit after its meeting on Wednesday and the weakness persisted in Europe, while gilts slid after third-quarter growth data beat expectations.

``Bunds haven't seen that much in terms of information and data so it's trading very technically in a very tight range and futures are currently testing the 140.00 level,'' a trader said.

``But they're really being buffeted by gilts and Treasuries this morning.''

Euro zone bond markets were still mostly at an impasse however, limiting moves, as they waited for a signal on when Spain may ask for financial aid -- a requirement if the European Central Bank is to buy its bonds.

Although Spanish bond yields have fallen sharply since late July and ministers insist the country can finance itself, Madrid is widely seen as having little choice but to ultimately seek help, and markets are impatient for clarity.

Few expected Spain to ask for a rescue before last weekend's local elections in Galicia -- Prime Minister Mariano Rajoy's home region -- but the government also faces elections at the end of November in econmically-important Catalonia, while shorter-dated funding costs have fallen to affordable levels.

And the head of the Spanish Treasury said on Wednesday that Spain was ready to start funding itself for 2013, having nearly completed its planned debt issuance for 2012.

Spanish bonds were broadly steady although 10-year yields were 4 basis points lower at 5.55 percent, having risen around 20 basis points this week.

``The market is (pricing) that if Spain has a problem there is a route out for them and that's a good thing,'' said Padhraic Garvey, ING's head of investment grade strategy.

He suggested selling Spanish bonds because so many market players had bought them in recent weeks.

``I don't think we'll get much more money in that trade so looking at the risk/reward they begin to sell off from here...but it's very difficult to trade because it's a very artificial market and if it does begin to sell off, that could very quickly be reversed.''

December Bund futures were 45 ticks lower at 140.02, having failed to hold above technical resistance levels in the 140.60 area on Wednesday, but traders and analysts did not see the sell-off running too far.

``The market seems to be quite short of Bunds, so we can grind higher,'' one said, referring to the bets market players place that prices will fall.

``That happened last week. Yesterday felt (like there was some covering of positions) and dealers also need to set up for next week's Italian supply so if we see more selling in the periphery then Bunds can perform.''

Italy will sell zero-coupon and inflation-linked bonds on Friday -- sales likely to be helped by redemption and coupon payments of 17 billion euros -- before a 5- and 10-year bond auction next Tuesday, details of which will be announced later on Thursday.

Benchmark 10-year German Bund yields were 4.5 basis points higher at 1.595 percent, but outperforming Gilts where yields were up 8 basis points.

``The renewed concern over the trajectory of the euro zone economy coincides with more uncertainty as to when Spain has another political window to enter a bailout-lite,'' Credit Agricole rate strategist Peter Chatwell said in a note.

``We have to concede that Bund bulls may attempt to bring the 10-year yield down to the obviously strong resistance of 1.50 percent.''

Gloomy economic data on Wednesday, including the euro zone's purchasing managers index falling to its lowest since June 2009 in October, underscored economic fragility in the region and offered support to safe-haven Bunds.

However, technical analyst Clive Lambert at FuturesTechs said that unless Bund futures rise above 140.63, corresponding to a gap left on the price chart by a sharply lower open last Wednesday, the market could target last week's low at 139.45.