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EURO GOVT-Bunds rise with U.S. Treasuries; Spain yield higher

Source: Reuters - Tue 14th Dec 2010

Bund futures rose on Tuesday, regaining some ground on the back of a recovery in U.S. Treasuries, with investors focused on the economic and fiscal outlook for benchmark U.S. and euro zone issuers.

Spanish yields rose as a sale of 2.5 billion euros of treasury bills showed it finding solid demand at high yields that underline the tension still surrounding the euro zone's more heavily-indebted issuers.

The Bund future FGBLc1 was at 124.83, 26 ticks up on the settlement close but broadly in line with after-hours trading.

After Monday's European settlement, U.S. Treasury futures TYv1 recovered sharply, triggered by a Federal Reserve buyback that brought investors back into the market.

"The rally in Treasuries has certainly been the driver in the long end of bond markets globally in the last 24 hours. We saw a very aggressive buyback by the Fed, which brought in dip buying and that has then driven bunds higher," a trader said.

The outperformance by U.S. debt narrowed the gap in yield between Treasuries and Bunds with 10-year U.S. T-notes last yielding 32 bps more than German debt. The spread had topped 40 basis points in the previous session.

Survey data from the ZEW think tank (1000 GMT) will provide insight German investor morale, with a Reuters consensus of analysts' forecasts for the headline numbers showing an improvement in sentiment and current conditions in December.

"We're looking for a reasonable rebound, driven by the current conditions," a second trader said.Given the selloff we've had in the last week there's more chance of a reaction if the figures come in on the downside."

Spanish 10-year yields ES1-YT=TWEB rose 9 basis points on the day to 5.572 percent, pushing the yield spread against Bunds wider to 261 bps. They were little changed after the T-bill sale. Madrid will issue longer-term debt later in the week.

A parliamentary confidence vote on Italian Prime Minister Silvio Berlusconi due to take place later in the day was another potential flashpoint for peripheral spreads.

Analysts said political uncertainty in one of the region's largest debt issuers could quickly unsettle investors in other higher-yielding euro zone debt.


Officials at the U.S. Federal Reserve meeting later in the day are expected to assess its latest $600 billion bond-buying programme but not signal any shift in its buying intentions, even though a planned extension of tax cuts could provide a boost to the economy.

"I expect the statement will confirm the dovish stance of the U.S. Federal Reserve, and probably highlight some concern on jobs. I don't expect that this will trigger any strong bullish momentum, it will take time for the market to get more constructive," said Patrick Jacq, BNP Paribas rate strategist.

The 10-year German bond yield DE10YT=TWEB was 2.962 percent, down 1.2 basis points while the two-year Schatz yield DE2YT=TWEB was 2.5 basis points lower at 1.39 percent.

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