LONDON: German Bunds eased on Wednesday after data showed November's US housing starts reached their highest in nearly six years, keeping investors cautious before a key Federal Reserve decision.
The housing figures fit a recent pattern of improving US economic data, which could affect when the Fed starts to scale back its monetary stimulus. Most economists expect the process "tapering," in market jargon to begin in March.
But the strong data made investors wary that tapering might start this month. Anticipation the Fed will be buying fewer bonds has weighed on US Treasuries in recent months, and to a lesser extent on German Bunds.
The two top-rated assets historically move in the same direction. On Wednesday, Bunds quickly gave up the gains they had made when Germany said it would reduce debt issuance to its lowest level since 2007 next year.
Bund futures closed 15 ticks lower on the day at 140.14, after rising as high as 140.49 earlier in the session. German 10-year cash yields rose 1 basis point to 1.84 percent.
"One important element for the Bund today was the release of the issuance calendar in Germany, which shows how (good) the fiscal situation is there," said Gianluca Ziglio, executive director for fixed income research at Sunrise Brokers. "
But then the housing starts were pretty impressive and the market started to work on the assumption that . the possibility that the Fed could taper was still on the table."
"KNEE-JERK REACTION"
Ziglio said that Bund yields could fall to around 1.70 percent if the Fed kept buying bonds at the current pace and rise to at least 1.90 percent if it started easing off. He does not expect the central bank to move this year.
"Whatever happens, there will be a knee-jerk reaction a bigger reaction probably if they announce a tapering today, (given that the) market should be slightly more positioned for a delay of the tapering," said Kevin Rettberg, a Commerzbank analyst.
"Either way, (Fed chief Ben) Bernanke will talk the other way in the press conference. If he is not going to announce tapering today he will prepare markets for tapering."
Italian 10-year yields rose 3 bps to 4.08 percent. Equivalent Spanish yields rose 5 bps to 4.16 percent, outpacing their euro zone peers.
Traders said Spanish yields were rising faster as investors sold the paper to make room in their books before the country's last auction of the year.
Madrid aims to sell 1.5 billion to 2.5 billion euros in bonds maturing in 2018 and 2023 on Thursday, having already reached this year's funding goal with a solid sale earlier this month.
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