LONDON: German Bund futures hit a three-week high on Thursday after an initial rise tracking US debt prices gathered steam when the contract broke through a series of technical barriers.
Automated buying extended an earlier rise based on growing expectations of bond-buying stimulus from the US Federal Reserve and poor euro zone economic data, driving Bunds sharply higher for a second consecutive day.
The September futures contract peaked at 143.72, up more than a point on the day and wiping out a large portion of August's losses, while Spanish bond yields gave back some of their recent gains.
German debt, closely correlated with US Treasuries, benefited early in the session from Federal Reserve minutes on Wednesday that suggested the US central bank may be closer to starting a new programme of bond buying than previously thought.
Adding momentum to the push into safe-haven assets such as Bunds, purchasing managers' index data showed the euro zone was heading towards its second recession in three years.
With activity subdued before a series of meetings next month that are expected to lay out how policymakers plan to prevent the euro zone debt crisis engulfing Spain, trading based on technical chart levels accelerated the rally in Bunds.
The contract broke above the trend line drawn from the late July and early August peaks, which came at 143.13, before going on to breach major resistance at 143.66 -- the Aug. 10 high.
"We still think it's unlikely we take out the July high (146.26) but we do think it's likely that we're going to go at least to 144.17, if not the 145.00 area before we come back off again," said Axel Rudolph, technical analyst at Commerzbank.
Rudolph said these targets were based on the 61.8 percent and 78.6 percent retracements of the five-point sell-off from July 23 to Aug. 15.
CAT AND MOUSE
Looming bond auctions and uncertainty over whether the European Central Bank will resume buying Spanish bonds to lower Madrid's borrowing costs next month weighed on markets at the forefront of the euro debt crisis.
Spanish two-year yields jumped 10 basis points to 3.71 percent, while Italian two-year yields rose 16 bps to 3.26 percent. Longer-term yields were higher as well.
The cost of insuring against a Spanish default was 26 bps higher on the day at 485 bps, according to Markit.
Traders cited selling pressure from domestic investors, who were already preparing for the resumption in peripheral bond supply next week, when Italy comes to market after a month's absence.
"We've got Italian supply next week and it is hard to see why should we tighten without any news from the ECB or Spain, it has become a game of cat and mouse," one trader said.
Question marks also remain over whether the euro zone's ESM rescue fund will get the green light from Germany's top court on Sept. 12 and whether Greece will receive another tranche of aid when the "troika" of international lenders gives its verdict in October after a review next month.
Comments
Comments are closed.