Reuters: Market News: EURO GOVT-Bund yields hit 6-mth lows; Spain, Italy pressured

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EURO GOVT-Bund yields hit 6-mth lows; Spain, Italy pressured Apr 10th 2012, 10:44 Tue Apr 10, 2012 6:44am EDT * Bund yields hit 6-mth lows after weak U.S. jobs data * Break to new lows seen possible in near term * Spanish/Italian bond selloff continues LONDON, April 10 (Reuters) - German Bund yields hit their lowest level since September on Tuesday after Friday's weak U.S. employment report added to growth concerns in the euro zone, with Spain taking centre stage in the region's debt crisis. Signs of a global slowdown would further pressure peripheral debt issuers battling with dwindling growth in the face of harsh austerity measures. As European markets reopened after the Easter break, Italian and Spanish bond yields continued their march higher after sentiment towards the two countries soured following a weak Spanish bond sale last week. The key U.S. employment report, which pushed long Treasury yields to four-week lows on Friday, showed payrolls grew by just 120,000 in March, far below expectations.. "Given the flight to quality, negative sentiment towards Spain and Italy and now doubts about the U.S. clearly playing into the risk-off environment, you can't rule out a test of 1.65 percent in 10-year German yields in the short term," said Nick Stamenkovic, rate strategist at RIA Capital Markets. Safe-haven Bunds have been caught between the conflicting forces of the euro zone debt crisis and signs of U.S. economic recovery that weighed on Treasury markets. But after Friday's data there was little resistance to a sharp move higher. June Bund futures were last 62 ticks higher at 139.77, less than a point off March's all-time highs of 140.52. Ten-year yields hit their lowest levels in more than six months at 1.665 percent, and were last 4 basis points lower at 1.688 percent, within spitting distance of September's all-time low of 1.637 percent. Even so, U.S. Treasuries have outperformed since the payrolls data was released with the yield gap over Bunds narrowing by around 10 bps to 35 bps since Friday. Demand for Bunds with yields so low will be tested on Wednesday with the launch of a new benchmark July 2022 bond paying a coupon of just 1.75 percent, the lowest to date. "It may be that the limited return and it being a new bond means that investors may want to wait to get involved," said Credit Agricole rate strategist Orlando Green. "But the environment does suggest there'll still be a decent amount of demand." MORE PAIN FOR SPAIN, ITALY Italian bonds were under pressure ahead of a 5 billion euro BTP auction on Thursday after last week's disappointing Spanish sale, with 10-year yields 16 basis points higher at 5.60 percent, and shorter-dated paper underperforming. "After the Spanish supply last week, and with Italian supply this week, I just don't think anyone is prepared to stand in the way of these moves," a trader said. "Nothing has fundamentally changed, at least with respect to Italy, but I'm less impressed with the dynamics of Spain's economy." Analysts see Italy as vulnerable to Spain's problems as the latter finds itself at the centre of the euro zone debt crisis on concerns about its ability to meet budget targets while facing recession and rising unemployment. Spanish 10-year yields were 17 basis points higher at 5.95 percent after rising around 25 basis points last week. The spread over Bunds is at its highest since early December, before the European Central Bank flooded banks with cheap three-year liquidity. "The (three-year ECB tender) was supposed to be the game changer but the stimulus it may have provided looks like it has worn off - save for perhaps helping to sustain the banking sector a little longer," said Societe Generale credit strategist Suki Mann, adding that the selling pressure had spread to bonds issued by corporates in peripheral euro zone countries. Bank of America Merrill Lynch technical analysts set a target of 6.51 percent for Spanish 10-year yields with the possibility of a move to November's highs of 6.83 percent. Traders said market flows were thin after the Easter break, however, with much of the movement on peripheral debt down to prices being marked wider. They added there was no sign of the ECB intervening in secondary markets after the central bank's asset purchase programme has been all but frozen since mid-February. "The question is, where is the ECB?" the trader said. "Has the bond purchasing programme finished? Is it on hold? Nobody knows." Also benefiting from demand for core paper, Austria sold 1.2 billion euros of 5- and 10-year government bonds on Tuesday and the Netherlands 3 billion euros of 5-year bonds. Link this Share this Digg this Email Reprints

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