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EURO GOVT-Bunds dip on concerns Fed may trim bond buying
June 18, 2013 / 7:42 AM / 5 years ago

EURO GOVT-Bunds dip on concerns Fed may trim bond buying

* Bunds fall in line with U.S. Treasuries

* Moves seen limited before Fed, 144.00 seen hard to break

* Bunds could outperform Treasuries near-term - analyst

By Marius Zaharia

LONDON, June 18 (Reuters) - German Bunds dipped on Tuesday in line with U.S. Treasuries on speculation the Federal Reserve will signal it is moving closer to trimming its bond purchases at a meeting this week.

Stimulus by central banks around the world has been the main driver of stock markets gains this year but has also served to put a ceiling on any rise in top-rated bond yields.

Concern that the Fed may slow down has shaken that status quo this month. Lower-rated euro zone bond yields moved away from multi-year lows and German yields hit their highest in three months last week, before weaker-than-expected U.S. data on Friday stabilised the market somewhat.

On Tuesday Bund futures were 22 ticks lower on the day at 143.56, with trades reporting low volumes driven by investors making their final adjustments to their positions before the Fed announcement late on Wednesday.

“There’s talk about the Fed tapering (down asset purchases),” said one trader. “(Overall) the market is now positioned for hopes that they might not be as aggressive as feared, but conviction is very low.”

Bunds face resistance around the 144.00 level, chartists say. The future failed to break that level on Monday, hitting 143.99 twice before retreating, while the 38 percent Fibonacci retracement of the May to June losses at 143.98 is seen as an extra shield to the 144 area.

While the price falls in Treasuries have weighed on Bunds recently - with the two assets usually moving in the same direction due to their safe haven status - analysts see potential for Bunds to outperform in the near term.

“If you look at Europe, there’s uncertainty that there will even be a recovery later this year,” Rabobank market economist Elwin de Groot said.

“The ECB will continue to use the verbal intervention weapon to contain money market rates,” he said, adding that he saw potential for a 10-20 basis points widening in the yield spread between 10-year German and U.S. debt in the next three months.

European Central Bank President Mario Draghi reiterated on Tuesday the bank was “ready to act” if needed to aid the euro zone economy. He also signalled that the monetary transmission mechanism, by which ECB rate moves are passed through to actual costs of borrowing in the economy, had improved.

The U.S./German 10-year yield spread was last 63 basis points.

Other euro zone bonds were relatively stable on Tuesday.

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