Bund yields hover above lows on QE hopes, but US data looms

LONDON: German Bund yields held just above record lows on Tuesday as anticipation of buoyant U.S. data tempered investor enthusiasm following hints of a forthcoming ECB asset purchase programme.

While disappointing euro zone growth and inflation has pushed the ECB towards radical policy action, a rebounding U.S. economy might persuade the Federal Reserve to raise rates - a move that could make such low Bund valuations hard to justify.

Of the raft of U.S. data due out later on Tuesday, strategists are predicting a big jump in durable goods orders. Economists polled by Reuters expect a 7.5 percent increase, while Commerzbank strategists see a 20 percent hike as possible.

"For today we see risks of a setback prevailing...finding yields at record lows while stronger U.S. macro data is waiting in the wings," said Commerzbank in a morning note.

German 10-year yields were 2 basis point lower on the day at 0.935 percent, having hit a record low of 0.926 percent on Monday as markets first reacted to ECB President Mario Draghi's comments at an annual meeting of central bankers in Jackson Hole, Wyoming.

In stronger language than he has used in the past, Draghi said late Friday that the ECB was prepared to respond with all its "available" tools should inflation drop further.

The ECB's governing council will meet next week, while the bloc's latest inflation data is due out on Friday.

All other euro zone bond yields were at or near record lows on Tuesday morning. Spanish and Italian bonds were the biggest movers, some 8 and 6 bps lower at 2.19 and 2.41 percent, respectively.

France's 10-year yields were 3 bps lower at 1.29 percent, after French President Francois Hollande on Monday called for a cabinet reshuffle.

The move has been welcomed by economists, who were glad to see the removal of leftist ministers who had argued for an economic policy U-turn away from budgetary rigour.

Strategists said the reshuffle also helped raise the prospect of an asset purchase programme, widely known as quantitative easing.

"French fiscal laxity is a threat to QE because it could stoke German opposition," said Lyn Graham-Taylor, fixed income strategist at Rabobank.

In other news, Greek bonds dropped 2 bps to 5.70 percent after Reuters reported the country plans to offer a bills-for-bonds debt swap in the coming weeks to top its three- and five-year bond issues by as much as 1.5 billion euros.