March 20, 2012 / 10:03 AM / 6 years ago

EURO GOVT-German Bunds rise as higher yields lure buyers

* Bunds’ rebound seen short-lived on resilient equities

* German 10-yr yields could rise to 2.20 pct in coming month

* Italian bonds steady as government, unions meet on reforms

By Emelia Sithole-Matarise

LONDON, March 20 (Reuters) - German government bond prices pushed higher on Tuesday as investors were lured back into the market after 10-year yields broke last week above 2 percent, the upper end of the year’s trading range to that point.

The rebound from last week’s sell-off was likely to be short-lived, however, with 10-year Bund yields expected to remain above 2 percent in the coming month against a backdrop of improved U.S. and German economic data that has lifted U.S. equities to within sight of record highs.

Reduced tension in the euro zone debt crisis after Greece clinched a second bailout last week and avoided a messy default have also contributed to a stronger tone in riskier assets, such as equities, although they were down in Europe on Tuesday.

Peripheral states such as Spain and Italy, where Prime Minister Mario Monti was meeting unions over labour reform, remain vulnerable to fiscal slippage, making investors cautious over the durability of the Bund rally.

“We’re seeing a bit of a bounce off last week’s sell-off but I don’t think it’s going to be very pronounced. I wouldn’t recommend investors chase this rally,” said RIA Capital Markets strategist Nick Stamenkovic.

“Whilst the Bank of England, the Fed and ECB are not going to raise rates any time soon the chances are that any further monetary accommodation starts to lessen and one of the key supports for core government bonds starts to fade and yields will start to move modestly higher over the next few weeks.”

He saw the German 10-year yield testing 2.20 percent over the next month.

The Bund last yielded 2.03 percent, 0.9 basis points less than at Monday’s settlement and retreating from this year’s high of 2.07 percent reached last week.

Credit Agricole strategists said that if Bund yields broke above an important technical level over the coming days, it would suggest they had entered a new higher range.

“In this context, the 10-year Bund would have to stay above 2 percent. Further validation of last week’s move would be if the Bund can test its 200-day moving average - around 2.12 percent - like the 10-year T-note and UK gilt have done,” they said in a note.

ITALY, SPAIN STABLE

In the euro zone periphery, Italian bonds rose, with the market wary about the labour talks, which could make or break Monti’s brief tenure at the head of a government struggling to pay down massive debts and revive the economy.

Italian 10-year yields were last up 4.2 bps at 4.88 percent .

The equivalent Spanish yield was up 4 bps at 5.21 percent after ratings agency Moody’s said Spain’s fiscal outlook remained challenging despite recently softened deficit targets. Moody’s said, however, that the new target did not affect its A3 bond rating with a negative outlook because a deviation from targets had already been taken into account.

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