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EURO GOVT-German yields at 3-wk high on improved US outlook
March 14, 2012 / 1:17 PM / 6 years ago

EURO GOVT-German yields at 3-wk high on improved US outlook

* German Bunds hit as Fed, stress tests fuel equities rally
    * German 10-year yields could rise to 2 pct in coming days
    * Italian yields slip after strong bond auction


    By Emelia Sithole-Matarise	
    LONDON, March 14 (Reuters) - German 10-year bond
yields spiked to a three-week high on Wednesday and could soon
retest this year's 2 percent peak after the U.S. Federal Reserve
sounded a less downbeat note on growth and most U.S. banks
passed their annual stress test.	
    Strong demand at a 6 billion euro auction of Italian debt
from cash-rich banks, which drove its three-year borrowing costs
to a near-17 month low, also dulled the allure of German
benchmarks. 	
    German Bund prices extended the previous day's losses
triggered by upbeat economic data after the Fed said that it
expected "moderate" growth over coming quarters along with a
gradual decline in the unemployment rate. 	
    "The Fed switch in its language to moderate in terms of
economic performance in the U.S. hit the back end of U.S.
Treasuries and the Bund is following suit," a trader said.	
    "A relatively strong BTP auction this morning is also adding
to the risk-on element."	
    German 10-year yields jumped 10 basis points
to 1.917 percent, its highest since Feb. 23. Some strategists
and traders said that in the coming days yields looked set to
hit the 2 percent level that has formed the upper end of their
trading range this year as improved prospects for the global
economy have fuelled a rally in riskier assets.  	
    The June Bund future fell more than a full point to
137.14, its lowest since Feb. 27. Selling in the contract
accelerated after stop levels were triggered around 137.40,
according to traders.	
    With European equities hitting new 2012 highs and the risk
of an imminent unruly Greek default averted, Bunds looked
vulnerable to further losses, prompting Commerzbank strategists
to maintain tactical short positions on the Bund."This combination of risk appetite coming back, on less
uncertainty with regards to the Greek rescue package and a
slightly more positive macro tone, are giving additional
headwind to Bunds," said Rainer Guntermann, a strategist at
Commerzbank.	
    "We could well imagine that the trading range could test the
upper side at 2 percent or slightly above on 10-year Bund
yields."	
    	
    SPAIN/ITALY SWITCH	
    Italian government bond yields fell across the curve
, outperforming other peripheral euro zone
issuers, after strong demand at its bond auctions - a five
billion euro BTP maturing March 2015 and 1 billion euros of an
off-the-run 2019 bond.	
    BTP futures rose to 106.69 from 106.30 before the
auction while the Italian 10-year yield was down seven bps on
the day at 4.84 percent, outpacing the Spanish equivalent which
was little changed at 5.16 percent. 	
    Credit Agricole strategists said they saw good value in the
new Italian three-year issue, and recommend switching out of
Spain's Jan. 2015 bond which has not been tapped since last
August.	
    "There is a 25 bps pick-up from the Spanish to the Italian
issue, making this possibly the best value Spain-Italy switch at
this time. At anything above 10bps, the switch makes sense and
should be held medium term," they said in a note.	
    Italian bonds have outperformed their Spanish counterparts
this year as market attention refocuses on Madrid after it
missed its 2011 budget deficit target. Spanish 10-year bonds
yield over 30 bps more than their Italian counterparts, after
trading almost 200 bps lower at the start of the year.

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