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EURO GOVT-Top-rated euro zone bonds yields up, rise seen brief
April 9, 2013 / 8:53 AM / 5 years ago

EURO GOVT-Top-rated euro zone bonds yields up, rise seen brief

* BOJ stance keeps high-rated bond yields near record lows

* Rally pauses to allow Dutch, Finnish debt to be absorbed

* French bonds seen especially at risk for a reversal

By Marius Zaharia

LONDON, April 9 (Reuters) - Yields on highly-rated euro zone bonds retreated from record lows on Tuesday, with a rally fuelled by the Bank of Japan’s plans for massive money printing pausing for the market to absorb fresh debt sales.

The BOJ unveiled an unprecedented $1.4 trillion stimulus plan last week, prompting speculation that some of the cash will spill over into other regions. This pushed yields on French, Dutch, Austrian or Belgian bonds sharply lower.

Analysts say yields could fall further in the near term, although doubts about how long a weakening economy such as France would be able to borrow at such low levels were seen limiting the move.

Dutch 10-year bond yields were last 6 basis points higher on the day at 1.50 percent, pulling back from last week’s record lows of 1.384 percent, after a sale of 20-year government bonds.

Finland was expected to sell a new 10-year benchmark via a syndicate later in the day.

“There is a little bit more room to go (for the rally in high-rated euro zone paper), but the air is getting thinner,” said DZ Bank rate strategist Christian Lenk, adding that the bonds most at risk of reversal were the French.

“The market is completely ignoring the bad news from France. Everybody is buying France because it offers a 50 bps pick-up over Germany,” he said.

Recent economic indicators have painted a bleak outlook for the French economy. The government is expected to miss its 2013 budget deficit target and analysts warn the country has made little progress in reforming its inflexible labour markets.

French 10-year yields were 5 bps higher on the day at 1.79 percent - offering a 54 bps premium over equivalent German Bunds - having hit a record low of 1.711 percent on Monday.

“Scepticism dominates that OATs (French bonds) will sustain the richening seen over the past few days,” Societe Generale strategists said in a note.

“And if the culprit is more Asian buying and less of a shift towards more credible policies by the French administration, then the pop in prices will indeed get ironed out.”

Italian and Spanish bonds, which also benefited from the appetite for yield, were a little higher.


Bund futures were 45 ticks lower on the day at 145.63, with some traders saying a strong start to the U.S. company earnings season was weighing on low-risk debt.

Bund futures hit their highest since June 2012 on Friday at 146.54 after weak U.S. jobs data and on expectations that the European Central Bank could ease monetary policy later this year to provide further support to the ailing euro zone economy.

Futurestechs technical analyst Clive Lambert saw support for the contracts at last Tuesday’s low of 145.10, with a break below that level needed to confirm this week’s fall in Bunds was more than a pause for breath.

“The danger when you get to these extended levels is that you get a couple of days with no European news and you drift away a bit,” one trader said.

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