Bunds fall as stocks stabilise, ECB purchases eyed

LONDON: Bund futures fell on Monday as stock markets tentatively recovered ahead of data showing how heavily the ECB has been buying Italian and Spanish bonds as investors seek to gauge the central bank's commitment to containing the debt crisis.

The Bund future fell 20 ticks to 132.76, though losses were limited by investor concerns over a weak global growth outlook and the threat of the euro zone crisis spreading despite the European Central Bank buying bonds.

"The selloff in Bunds doesn't appear to be too great... In (10-year) yield terms 2.35-2.40 percent is still ultra-low and reflects a market concerned about the trajectory of the US economy and the peripheral crisis," Credit Agricole strategist Peter Chatwell said.

Markets will be closely watching the ECB's 1330 GMT announcement to see how much the bank spent to support Italy and Spain last week after its landmark decision to buy the countries' bonds.

Yields on Italian and Spanish bonds both fell to around 5 percent last week, from levels round 6.5 percent previously, on the back of ECB buying aimed at stopping the spread of the crisis to the euro zone's third and fourth largest economies fears and stabilising markets.

Analysts were expecting at least 10 billion euros of purchases, and said a lower amount might raise concerns over how hard the ECB was prepared to fight any fresh upward pressure on yields when both countries resume issuing bonds.

"The more important question is how much money the ECB will have to commit in coming weeks in order to stop the inherent spread widening pressure as some investors are still looking for the exit door," said Commerzbank strategist Rainer Guntermann in a note.

Broader financial market volatility was set to support safe-haven Bunds after sharp swings in equities last week pushed investors into less risky assets.

The Bund future remained within two full points of all-time highs at 134.77 while traders cited support levels around the 130.60 mark after the contract failed to break below this point twice in the last two weeks.

EURO BONDS IN SIGHT

The latest focal point of policymakers' attempts to bring the region's debt crisis under control comes on Tuesday when the French and German leaders meet in Paris.

Expectations were low of an outcome that dealt decisively with the structural issues and imbalances exposed by the debt crisis, analysts said, but even preliminary moves to address such problems would support sentiment towards risk assets.

Any sign that Germany's tough opposition to a common euro zone bond -- which some see as the only real solution to the region's debt problems -- could ease risk aversion and nudge German yields higher, market participants said.

The prospect that Germany's borrowing costs would rise under any common issuance would also support higher Bund yields, a trader said.

Italian economy Minister Giulio Tremonti became the latest politician to call for mutual issuance by euro zone states, although Germany's finance minister quickly poured cold water on the idea.

Ten-year German debt last yielded 2.35 percent, up 1 bps on the day while at the short end of the curve two-year yields rose by a similar margin to 0.71 percent.

Public holidays in Austria, Greece and Italy limited market activity.

Copyright Reuters, 2011