LONDON: German government bonds pushed higher on Friday as European stocks fell after Federal Reserve Chairman Ben Bernanke said the recovery was much less robust than expected
Bunds were seen remaining well-bid going into next week on the euro zone's debt problems -- refocussed on problems with a bailout deal for Greece -- and as traders brace for a resumption of Italian and Spanish auctions.
Many expected Bernanke to use his speech in Jackson Hole, Wyoming, to give a steer on the central bank's options for further economic stimulus but he said the Fed's policy panel would discuss them at a two-day meeting in September. The Fed initially planned to meet for one day and some traders said the extra day left the door open for future stimulus, taking Bunds session highs.
Bund futures settled up 37 ticks on the day at 135.21, adding to gains made on Thursday and at historically elevated levels, albeit down from record highs hit last week.
The pan-European share index ended a volatile session down 0.65 percent on the day.
"Equity markets were positive at the beginning of the week expecting a lot and are now toning down expectations a bit. But the whole growth outlook does favour more the safe-haven bond market," said Evolution Securities strategist Elisabeth Afseth.
Ten-year German yields were last 3.6 basis points down at 2.15 percent, having fallen as low as 2.06 percent soon after Bernanke's speech, not far from record low levels of 2.028 percent plumbed last week.
GREEK PROBLEMS DRAG ON
The debt crisis remained a key factor underpinning Bunds, with the latest row over Finland's demand for collateral to back its contribution to Greece's second bailout keeping investors on edge and Greek debt under pressure.
Greece also formally announced its plans for a bond swap that will inflict some of the cost of its second bailout on private investors.
The plans surprised some by stating that without 90 percent participation from bondholders the swap -- the result of tough negotiations last month -- would not go ahead.
"By pinning it down so high, without any leeway in terms of a target range ... it seems to me that they really like to put some pressure on the system here," Schnautz said.
Yields rose across the Greek curve on Friday with two-year yields continuing to set new record highs above 47.6 percent. The 10-year yield spread -- a measure of the risk premium over German debt was last at 1,627 basis points, within sight of record highs set in the previous session.
One sign that policymakers' response to the crisis was having a positive effect came in the shape of a strong Italian short-term debt auction.
The European Central Bank stepped in earlier this month to support Italian and Spanish markets by buying bonds on the secondary market to ease concerns that the countries could be sucked into the debt crisis.
However, the real test of whether this intervention has worked could come at next week's bond sales, when Italy will launch a new 10-year bond and Spain debuts a five-year issue.
Copyright Reuters, 2011
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