January 25, 2013 / 9:02 AM / 5 years ago

EURO GOVT-Bunds in range on bets of mixed data, ECB payment eyed

* Bunds rise but expected to remain in recent ranges

* A strong ECB repayment number could impact short-end

* Investors look to Ifo for further sign of German recovery

By Ana Nicolaci da Costa

LONDON, Jan 25 (Reuters) - German Bunds rose on Friday but kept within recent ranges as traders expected mixed data out of Europe and only a limited impact from the European Central Bank’s loan repayment announcement.

Britain’s economy is expected to have contracted 0.1 percent in the fourth quarter of last year, according to a Reuters poll, while Germany’s Ifo index, a key barometer of the country’s economic health, is seen rising for a third month in January.

The ECB will also announce this session how much banks plan to repay of the 489 billion euros they borrowed from it in the first round of cheap long-term financing in December 2011.

Although Italian and Spanish bonds are expected to withstand any withdrawal from the banking system next week, the repayment could impact money markets and two-year German yields, which are more sensitive to interest rate expectations. .

Two-year German yields were little changed at 0.18 percent, while 10-year yields were 1.2 basis points lower at 1.50 percent.

“If you start with a strong number from the beginning, expectation will mount that more banks will come later,” Alessandro Giansanti, senior rate strategist at ING, said.

Traders expect 100 billion euros will be returned to the ECB next week, according to a Reuters poll but forecasts ranged from 30 billion to 250 billion euros..

A number above 200 billion euros could lead to further repricing of interest rate expectations as markets interpret a reduction in liquidity as the first step towards a more hawkish or tighter monetary policy, he said.

“There is still a possibility for a further rise of overnight Eonia (rates) if the market starts to think we will have consistent shrinkage in the excess liquidity ... If the market expects liquidity will go down, you will have pressures on two-year German bonds as well,” Giansanti added.

Eonia rates last stood at 0.068 percent.


Markets were braced for an upbeat German sentiment number after the Mannheim-based ZEW think tank said earlier this week its monthly poll of economic sentiment climbed for a second month in January to its highest level since May 2010.

A stronger-than-expected number could weigh on Bunds which were rebounding after a sell-off in the previous session, analysts said.

One day after upbeat German private sector activity data, such a number would also reinforce the view that the euro zone’s largest economy is serving as a beacon of growth in a region still struggling with the fallout of the debt crisis.

”The risk is Ifo is on the strong side after ZEW was strong - that’s probably the way we are going into it,“ one trader said. ”That’s in the price to a degree as well.

“At the end of the day markets are in somewhat of a range and I don’t see any reason why we are going to break out today,” he said, pointing out that Bunds had traded within a 142-144 range for most of January.

Despite the rise in German bond prices, peripheral bonds were also higher. Ten-year Spanish bond yields were down 3.5 basis points at 4.99 percent and the Italian equivalent was 2.8 bps lower at 4.12 percent.

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