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German Bunds hit three-week highs on U.S. growth concerns

Marius Zaharia
Wednesday, 23 Oct 2013 | 6:59 AM ET

* German Bunds extend gains on weak non-farm payrolls

* Focus turns on upcoming European business surveys

* Strong euro may limit any Bund pull-back

LONDON, Oct 23 (Reuters) - German Bund futures hit three-week highs on Wednesday, extending gains on the back of Tuesday's below-forecast U.S. jobs data, which raised expectations the Federal Reserve would delay trimming stimulus.

The numbers showed recovery momentum in the U.S. economy was weaker than expected even before October's 16-day government shutdown caused by a political spat over the budget and the public borrowing limit.

An 11th-hour deal to lift the debt ceiling allowed the government to re-open but provided funds only until Jan. 15, raising the prospect of another budget battle early in 2014.

The political uncertainty is expected to have a detrimental impact on growth and therefore prompt the Fed to hold off on plans to scale back its $85 billion monthly purchases of Treasuries and mortgage-backed securities.

Before the shutdown, expectations for when the Fed might "taper" its bond-buying tilted towards the end of the year, but have since been pushed back to early 2014. The September jobs report has cemented those expectations.

"The market is still digesting the non-farm payrolls ... The data is favouring a delay of (Fed) tapering," said Felix Herrmann, market strategist at DZ Bank in Frankfurt.

Bund futures were last 16 ticks higher at 140.70, having earlier hit a three-week high of 140.84. They have risen almost two points in the past week.

Cash 10-year German yields fell to their lowest since early October at 1.769 percent.

"The bond market momentum has picked up," said Jan von Gerich, chief analyst at Nordea in Helsinki. "We're not even at September lows so German yields can fall further today."

Last month's low in Bund yields was 1.694 percent.

A sale of German 30-year bonds had limited market impact as it received bids above market prices, easing concerns about a drop in demand.

FOCUS BACK ON EUROPE

October jobs data on Nov. 8 may give markets a better idea about the impact of political uncertainty on the U.S. economy, but until then, the focus may turn back to Europe.

Euro zone manufacturing and services PMIs are due on Thursday followed by the German Ifo business sentiment survey on Friday.

Von Gerich said neither was likely to knock Bunds lower.

Weak numbers would suggest the euro zone recovery was also losing momentum, enhancing the appeal of top-rated German debt. But good numbers might further strengthen the euro currency, raising the risk of policy easing by the European Central Bank.

"I would have thought a strong euro would bring inflation even lower, raising chances for a policy reaction," one trader said. "It's a potential supporting factor for Bunds."

The euro is trading at two-year highs against the dollar , while euro zone inflation was 1.1 percent in September, way below the ECB's target of close to 2 percent.

Spanish bonds outperformed other peripheral debt after data showed Spain escaped a lengthy recession in the third quarter. Spanish 10-year yields fell 3 basis points to 4.19 percent.