German debt rises on plans to cut 2014 issuance

LONDON: German bonds rose on Wednesday after news that Germany plans to cut debt issuance to the lowest level since 2007 next year but gains were limited as investors awaited a key U.S. Federal Reserve decision.

Excluding inflation-linked debt, Germany plans to issue 205 billion euros of debt next year, down from 247 billion euros this year. The government plans to cut new borrowing to 6 billion euros in 2014 - its lowest level in 40 years - and it will also have fewer debts to repay.

"The announcement about issuance has been a supportive factor," said Nick Stamenkovic, bond strategist at RIA Capital Markets. "It does support Bunds but I think investors are reluctant to push Bunds aggressively ahead of today's decision by the Fed."

Thirty-year bond yields were 2.2 basis points lower at 2.66 percent and five-year yields fell 1.2 basis points to 0.80 percent.

Two-year yields dropped 2.1 basis points to 0.21 percent, with analysts saying bond prices were recovering, having been under selling pressure recently due to thinning liquidity in money markets.

German Bund futures were 18 ticks higher at 140.47. Ten-year German yields were down 1.3 basis points at 1.82 percent, well within this month's 1.70-1.89 percent ranges. They hit a seven-week high of 1.89 percent earlier this month on expectations the Federal Reserve's tapering could start sooner rather than later.

Investors had been expecting the Fed's asset-purchase programme, which has helped underpin financial markets during years of crises, to be trimmed in March.

But some have brought forward those expectations following upbeat U.S. data, and there is a chance the U.S. central bank could announce a scaling back of the scheme with its post-meeting policy announcement on Wednesday evening.

"KNEE-JERK REACTION"

Indeed, recent growth in jobs and retail sales, as well as a fresh budget deal in Congress, has persuaded a growing number of economists that this is an opportune time for the Fed to trim its $85 billion in monthly bond purchases.

That view has been reflected in the U.S. Treasury market, analysts said, with 10-year yields having risen more than 20 basis points over the past two months to 2.85 percent.

But many still believe the central bank will wait until early next year, given subdued inflation pressures and that the U.S. economy has stumbled since its 2007-2009 recession.

"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 in (Q1)."

Italian yields were little changed at 4.05 percent. Spanish bonds fell one day before an auction, with yields 1.6 basis points higher at 4.12 percent.

"It's a repositioning of banks going into the end of the year," said Patrick Jacq, European rate strategist at BNP Paribas. "We saw that banks are still deleveraging and particularly in Italy and Spain. This is not really a threat for BTPs or Bonos, it is more something which could prevent spread compression from being very significant."

He was referring to the reduction of the premium Italian and Spanish 10-year bonds offer over their German counterparts.