Bunds stall but weak economy to keep uptrend intact

LONDON: Bund futures slipped on Friday as profit taking saw prices pull back from record highs set in the previous session, but the rally remained poised to resume next week on any further signs of economic weakness.

The contract fell half a point but still ended the week over two full points higher with market participants expecting more record highs next week.

"There's been profit-taking on long positions so we're seeing a shallow pull-back but the bull trend could resume next week," a trader said.

Acute concerns that the global economy was slipping into a fresh recession flared up in the previous session after forward-looking data from the US came in way below consensus. Those concerns have pushed equities sharply lower and seen investors scramble for safe-haven assets.

"We're talking about simple cash preservation in this environment," the trader said.

While European Central Bank buying appears to have eased concerns over rising Italian and Spanish yields -- both remained below the 5 percent level on Friday -- a run of weak economic data has kept market tensions sky-high.

"Any kind of indication in macro data supporting the fears of economic slowdown or even sign that we are heading for a new recession are definitely something that will cause a lot of concern in the market," said Nordea's chief analyst Niels From.

Among the data released next week, the forward-looking German Ifo sentiment survey would draw particular attention as growth in the euro zone become increasingly reliant on the country, From said.

Bund futures settled at 135.31, down 44 ticks on the day. Ten-year yields rose to 2.10 percent after setting a record low of 2.028 percent on Thursday.

"With the negative sentiment stemming from the equity universe, there is still potential for the Bund future to mark new highs again," Unicredit strategist Kornelius Purps said.

"There are simply too many factors which are of concern for investors, be it the business cycle outlook, be it the dollar funding issue with the ECB ... be it risk that the rescue package for Greece might fail due to these collateral demands, be it the discussion about a transaction tax in Europe."

The German curve notably flattened in the 10/30-year sector as investors increasingly sought out better value in longer-dated bonds and with investors positioning for further flattening against the gloomy backdrop.

Investors were also anxious about the possible ramifications of Austria, the Netherlands and Slovakia seeking collateral on loans to Greece after Finland secured a commitment, casting doubts on the efficacy of a second bailout package for the country agreed in July.

"The political risks implicit in this unfolding episode are significant," Rabobank strategist Richard McGuire said.

Among these, he said requests for collateral by one or more bailout sponsors could result in an impasse as Greece refuses to pay for assistance or one or more euro zone members refuses to endorse the Finnish deal if they fail to get collateral.

In non-core euro zone debt markets, Italian and Spanish 10-year yields hovered just below 5 percent with traders saying the European Central Bank had bought small amounts of short-dated Italian debt.

Copyright Reuters, 2011