Bund futures fell on Friday as bond markets positioned for a stronger-than-forecast US payrolls report after a run of upbeat economic data releases this week. The futures slid to 123.06, 16 ticks lower on the day, while the price of other safe-haven securities such as US Treasuries and Japanese government bonds also fell.
Employment data released earlier in the week as part of the Institute for Supply Management indexes along with signs of accelerating GDP growth have boosted the belief that the US economic recovery can be self-sustaining. "The market seems to be looking for a stronger number which probably indicates how they're positioned. Maybe then if it is weak, it could be quite vicious," a trader said.
The median of forecasts for the non-farm payrolls report from analysts polled by Reuters is for employers to have added 145,000 jobs in January after adding 103,000 in December. Technical charts suggested Bund futures could be poised to reverse losses while trading above the recent low of 122.63.
A sustained break above Thursday's session high of 123.33 could pave the way for a move higher to 124.12 - the 38.2 percent Fibonacci retracement of a selloff from January 5 to February 3, said UBS technical analyst Richard Adcock. Spanish, Italian and other lower-rated euro zone debt outperformed Bunds in early trade, with investors taking advantage of a fall in prices in the previous session to buy.
"Yesterday we had a little bit of softness but no follow-through selling and now the market's just snapping back in," a trader said, adding that there was little flow driving the tightening. Investors in peripheral debt will be looking to a European Union summit in Brussels for any sign that leaders are close to agreeing new crisis-tackling measures, and what those measures will be. A news conference is scheduled for 1630 GMT. Growing expectations of changes to the European Financial Stability Facility - the euro zone rescue fund used to bail out Ireland - has seen debt issued by the currency bloc's fiscally weaker states outperform in recent weeks.
The cost of insuring euro zone sovereign debt against default, as measured by the Markit iTraxx SovX western europe credit default swap index, has fallen to 166 bps, down by more than 50 bps since peaking at 222 bps in January. But the prospect of market-moving announcements from EU leaders on Friday was limited, analysts said, with policymakers signalling that a solution was more likely to be reached at a March 24/25 leaders summit.
"Even though we don't expect any significant news out of the EU council meeting, sentiment coming out should be rather positive for the periphery," said Norbert Aul, rate strategist at RBC Capital Markets in London. The 10-year German bond yield was 3.23 percent, up 1.6 basis points, while the two-year Schatz yield was 3.6 basis points higher at 1.387 percent.
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