Bunds hit new high as debt, growth worries persist

LONDON: German Bund futures hit a record high on Thursday, and looked set for further gains, as investors shunned risk over a weak economic outlook and concerns that policymakers were not doing enough to tackle the euro zone debt crisis.

Bund futures passed peaks last seen in August 2010 to hit an all-time high of 135.03, taking out key resistance levels and rising more than a full point on the day.

The rally built on gains from Wednesday after markets looking for positive steps to address the debt crisis were left disappointed by the outcome of a Franco-German summit which instead focused on longer-term issues.

"It's really this view about slower growth for longer and the political difficulties within Europe... In the current environment any setback will be seen as a buying opportunity," said Commerzbank strategist Rainer Guntermann.

"Maybe the road gets a little bumpier from here but as long as the uncertain, risk-averse environment continues there is scope for the Bund future to rise and yields to test and possibly fall below record levels."

Yields on Italian and Spanish debt maintained their recent push lower. Ten-year Italian paper hit a 6 1/2-week low of 4.89 percent before rising back to 4.92 percent. Equivalent Spanish yields fell to their lowest since February at 4.91 percent and were last at 4.94 percent.

Debt issued by both countries has outperformed since the European Central Bank stepped in to buy their bonds in a bid to drive yields down from unsustainable levels. Traders said ECB activity in the market has been thinner in recent days, with one saying his bank had received no enquiries this session.

The low appetite for risk was evident across asset classes as European equities fell, following declines in Asia.

Weak data from euro zone powerhouse Germany this week has put investors on high alert for signs that the tentative recovery in euro zone growth could falter -- an outcome that would multiply problems facing the region's weakest states.

"We need to see positive third-quarter data for the euro zone... until we see some positive data we will continue to have pressure on yields to go lower," said ING rate strategist Alessandro Giansanti.

The 10-year German government bond yield fell to its lowest since Sept. 1 around 2.15 percent -- within 7 basis points of its record low.

Two-year Schatz yields fell by a smaller margin, to 0.62 percent, underperforming the long end as investors preferred the higher yields on offer in longer maturities.

NO RESISTANCE IN SIGHT

With the Bund future in new territory, technical charts showed few immediate resistance points after the contract edged above the 135 psychological level.

"It's a tough job to look for 'what next' on charts that are in new territory... the next Elliot wave target appears at 136.66," said Clive Lambert, technical analyst at Futurestechs.

Looking at momentum indicators, using a 14-day RSI (Relative Strength Index) Lambert said that despite hitting new highs, the contract did not appear overbought.

Reuters charts showed the RSI last at 70.4, below the 75 level Lambert said would signal buying had stretched too far.

The US data calendar offers the most high-profile economic indicators later with inflation, employment and housing data along with forward-looking economic sentiment survey results.

The US core inflation rate was forecast to rise, but with markets in a negative mood and the Federal Reserve committed to keeping rates low in the medium term, bond markets were likely to be more sensitive to below-consensus data.

"It feels more like a downside surprise on inflation will send the market higher rather than an upside surprise because we know that rates are going nowhere," a trader said.

Copyright Reuters, 2011