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Fed outlook lifts Bund futures to two-month highs

Marius Zaharia
Tuesday, 29 Oct 2013 | 7:23 AM ET

* Fed to start two-day meeting later on Tuesday

* Bund futures edge up to highest since mid-August

* Fed outlook supports lower-rated bonds as well

LONDON, Oct 29 (Reuters) - German Bund futures hit two-month highs on Tuesday on investor expectations the Federal Reserve will maintain its current level of monetary stimulus until early next year.

Lower-rated Spanish and Italian bonds also firmed as the Fed outlook supported bonds across the credit spectrum.

The Fed starts a two-day policy meeting later on Tuesday, the first since a 16-day U.S. government shutdown caused by political fighting over the budget earlier this month.

The shutdown is expected to weigh on the U.S. recovery and traders expect the Fed to keep buying bonds at the current pace until at least March, supporting Treasuries and Bunds.

The deal that reopened the government only provided funds until mid-January, raising the risk of another budget standoff early in 2014, which could further hit growth

Before the shutdown, investors had expected the Fed to start trimming the massive programme in December.

"Expectations for (Fed bond-buying) tapering have been pushed further (back) in a drastic way," said Jussi Hiljanen, chief fixed income strategist at SEB in Stockholm.

"Uncertainty will remain in the coming months and it tends to have a depressing effect on growth ... and it should keep long (dated) yields depressed as well."

Bund futures were up 7 ticks at 141.22, having hit a two-month high of 141.32 earlier. Cash 10-year German yields were 1 basis point lower at 1.74 percent.

Equivalent Spanish yields fell 4 bps to 4.06 percent. Italian yields fell 7 bps to 4.13 percent.

Elwin de Groot, senior market economist at Rabobank in Utrecht, said any mention of political uncertainty in the Fed's statement would cement current market expectations.

"But given the political uncertainties, the impact of the shutdown, the fact that the economy was slowing even before the shutdown, they will have to send a dovish signal," he said.

Some traders said upcoming supply of triple-A rated debt was preventing Bunds from climbing further. The U.S Treasury will sell $35 billion of five-year notes on Tuesday and $29 billion of seven-year notes on Wednesday.

Finland sold 1.5 billion euros of 2018 and 2042 bonds. Germany will auction up to 4 billion euros of 10-year debt on Wednesday.