Markets

German 10-year bond yields meet resistance at 2pc

LONDON : German 10-year government debt yields struggled to break above 2 percent on Thursday, slowing a bond sell-off f
Published March 15, 2012

germany-bondsLONDON: German 10-year government debt yields struggled to break above 2 percent on Thursday, slowing a bond sell-off fuelled by an improved sentiment towards the global economic outlook.

Better data from the United States and an upgraded outlook from the Federal Reserve in recent days have boosted confidence on markets after a After a Greek debt restructuring gave the market breathing space in the euro zone debt crisis.

This provided a favourable backdrop for Spain's sale of 3 billion euros of short-term and medium-term bonds, even though it was in the middle of the target range. France sold 8.46 billion euros across the curve.

But market players said buyers emerged when 10-year German yields tested 2 percent.

"We appear to have met some resistance," Richard McGuire, senior fixed income strategist at Rabobank said. "We haven't broken through the 2 percent level in 10-year Bunds."

That would threaten the upper end of the 1.77-2.02 percent range that has held since mid-December.

"Near-term I think it is hard to fight the liquidity risk-on move. Further out we stick to our risk-off guns."

Ten-year German yields stood 1.3 basis points higher at 1.97 percent.

German Bund futures earlier fell to their lowest since February at 136.26 but last stood at 136.55, 24 ticks lower on the day.

Societe Generale said the Bund was likely to decline as low as the 132.63/89 support zone, after breaking below the 136.93 support level and before rebounding again.

"It looks to be more of a corrective sell-off ... rather than any big signal of a change in investment ideals in the market. I think the Bund is likely to get support at 2 percent," Peter Chatwell, strategist at Credit Agricole, said.

"That level is really important. If we would see the Bund sell off through 2 percent, I think that would probably trigger more selling in (US) Treasuries, along with Bunds and also (UK) gilts."

IN ITALY'S SHADOW

Spain's bond sales drew strong support from investors flush with central bank funds casting off doubts for now that the country will be able to stick to its deficit commitments while the economy stutters.

The sale of the 2015 bond drew bids for five times the amount on offer, while the 2016 bond saw a bid-to-cover ratio of 4.1 - above those of previous sales. Average yields also fell. "The trick of issuing less seems to have worked. This is much less than what the market has been used to this year," said Achilleas Georgolopoulos, rate strategist at Lloyds.

The Treasury would have met just shy of 45 percent of its issuance plans for the entire year if it had sold at the top end of its 2.5 -3.5 billion euro target range.

"Certainly the initial impression is that the Spanish auction is not nearly as well received as the Italian auction. That should continue to ensure that Italian bonds outperform Spanish bonds in the near term. The biggest disappointment is they didn't manage to raise the maximum target," Nick Stamenkovic, strategist, RIA Capital Markets said.

There was strong demand at a 6 billion euro auction of Italian debt from cash-rich banks on Wednesday.

In the secondary market, Spanish bonds continued their recent underperformance versus Italy.

Ten-year Spanish bonds were under pressure with yields up 1.8 basis points at 5.18 percent while Italian yields were steady at 4.86 percent.

The 10-year yield spread between the two stood slightly above 32 bps, after reaching parity in early March.

 

Copyright Reuters, 2012

 

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