November 10, 2017 / 9:07 AM / a year ago

UPDATE 3-Bund future sell-off rattles euro zone bond markets

* Germany’s 10-year yield hits 2-wk high at 0.41 pct

* Move triggered by sharp sell off in Bund futures - sources

* Euro zone bond yields up 1-4 bps across the board

* Euro zone periphery govt bond yields (Updates prices)

By Abhinav Ramnarayan and Polina Ivanova

LONDON, Nov 10 (Reuters) - Euro zone bonds sold off for a second straight day on Friday with analysts and traders citing a sharp sell-off in German government bond futures, comments from ratesetters and an expected supply glut as the main drivers.

The move was first triggered by aggressive selling of Bund futures by one or two large investors late on Thursday morning, two trading sources told Reuters, but continued into Friday with yields higher across the bloc.

“On the Bund futures, you had a very large open interest position, extremely large,” said BNP Paribas Asset Management’s sovereign chief Patrick Barbe, referring to the high volumes which usually suggests a big move in the market.

He believes a key investment manager decided to switch their exposure from Bunds to U.S. Treasuries because of the widening gap between the two.

The spread between German and U.S. 10-year borrowing costs widened out to 200 basis points on Wednesday but tightened sharply to 195 bps on Thursday, possibly reflecting this switch.

Barbe also believes comments this week from ECB members have changed the market’s momentum.

“The rally changed suddenly two days ago when some ECB members spoke about their own view on the way to manage the monetary policy after September,” he said.

He said the comments show that ECB monetary policy is still an open discussion.

ECB board member Sabine Lautenschlaeger said this week the ECB should have set a clear end date for its asset purchase programme. Governing Council member Philip Lane said the bank can tighten monetary policy more decisively once inflation is on a clear path towards the target.

German bond futures, a derivative often used by speculative investors to bet on bond price movements, fell to a two-week low on Friday at 162.13. That marks a sharp fall from a high of 163.63 on Wednesday and followed a two-hour period of intense selling on Thursday.

RBC researchers said in a note that the broad correction in markets was driven by Thursday’s Bund sell off, adding that it was driven out of Europe.

“We can’t pin-point the selling pressure to a data release or central bank statement and anecdotal reports suggest that larger selling orders were placed in future and cash markets,” they said.

Two sources told Reuters on Thursday that a few large, institutional investors had triggered the sell off.

The end result is that the yield on Germany’s 10-year government bond, the benchmark for the region, hit 0.41 percent for the first time in two weeks on Friday and was last up 3 bps on the day.

Other euro zone government bond yields were also 1-4 bps higher on the day, with Italian bond yields set to end the week up 6 bps - the first weekly rise in five weeks.

U.S. Treasury yields were also up sharply, while a long-term market measure of euro zone inflation expectations rose to an eight-month high at 1.6851 percent.

Hefty supply in the pipeline has also soured bond market sentiment. ING estimates 25-30 billion euros of new supply from Germany, the Netherlands, France, Spain and Italy next week. Yields often rise ahead of government bond auctions as investors make room to participate in the sales.

Additional reporting by Dhara Ranasinghe,; Editing by Ed Osmond

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