Bunds rally on gloomy Fed outlook, Operation Twist

LONDON: Bund futures opened higher on Thursday as the US Federal Reserve's gloomy outlook on economic growth hit riskier assets across the globe with new plans to lower long-term borrowing rates adding to the strength of the rally.

The Fed unveiled, as anticipated, plans to sell short-term Treasury holdings and buy longer-dated bonds -- a move dubbed "Operation Twist" -- in an effort to push the cost of borrowing lower and bolster the country's housing sector.

The scale of the programme at $400 billion surprised some in the market and saw the US Treasury curve flatten sharply.

Bund futures rallied to hit a session high of 138.58 -- within a whisker of the 138.91 contract high. Ten year German yields were 6.5 basis points lower on the day at 1.70 percent.

The moves in German debt were smaller than those seen in higher-yielding US Treasuries, narrowing the 10-year yield spread to 5 basis points from around 12 bps at the European settlement on Wednesday.

"The curve has got to take sympathy from the US moves, but why should the European curve flatten? The ECB aren't going to do anything this radical?," a trader said.

In the euro zone, Greece made new budget-cutting pledges aimed at securing the next slice of bailout funding from international lenders.

However, the news was unlikely to bring much relief to bond markets with question marks over the state's ability to implement the new measures meaning a default was still seen as likely in the medium term.

"As ever, the question is, will these measures be implemented and maintained by the current government and the governments to come?," said Societe Generale strategists in a note to clients.