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German bonds rise on patchy global services data
January 6, 2014 / 12:31 PM / 4 years ago

German bonds rise on patchy global services data

* Equity weakness, Chinese data underpins Bunds

* Euro zone business activity solid in December

* Some pockets of weakness in euro zone services sector

* Recovery expected to keep periphery buoyant

By Ana Nicolaci da Costa

LONDON, Jan 6 (Reuters) - German government bonds rose on Monday as pockets of weakness in the global services sector gave investors a reason to buy safe-haven debt.

Bunds first took their cue from weaker stock markets after data showed growth in Chinese services industries slowed sharply last month.

While businesses across the euro zone enjoyed a strong finish to 2013, surveys showed, Italy’s services sector contracted for the second month running in December while France’s also lagged.

“Overall it confirms that there is still a recovery in the euro area but also that recovery is still very fragile. We had quite a weak number for Italy for example,” Elwin de Groot, senior market economist at Rabobank said.

German Bund futures rose 32 ticks to 139.41, pushing 10-year German yields 2.6 basis points lower to 1.92 percent.

One trader said the fact Germany’s first bond auction of 2014 was not until Jan. 15 also supported the market.

Other highly-rated euro zone debt also rose. Ten-year Austrian yields were 2 bps lower at 2.24 percent and the French equivalent was 1.9 bps lower at 2.34 percent.

French services companies saw business pull back in December at its fastest pace in six months.

“Even though the headline figures looked quite reassuring, the details of some of the (countries) were not great,” Nick Stamenkovic, bond strategist at RIA Capital Markets, said.

PERIPHERY STRENGTH

Analysts expected a rally in lower-rated bonds to continue, despite a pause in some markets on Monday, as data showing the euro zone recovery taking hold gives investors confidence to buy.

Manufacturing activity data from Italy and Spain beat expectations in December, while the Spanish unemployment rate also dropped. [ID:nL9E7N202R[

Spain has particularly stood out, with its service sector growing at its fastest pace in 6-1/2 years in December, according to the survey.

“The Italian (data) showed some improvement but not as much as the market had hoped for which I think outlines the problem BTPs are having against Spain at the moment,” the trader said.

“Despite the fact that we have Spanish supply coming this week, we would probably favour Spain to continue outperforming BTPs in the medium-term.”

Ten-year Spanish yields were flat at 3.91 percent, and the Italian equivalent was steady at 3.94 percent.

The premium they offer over German Bunds fell below the 200 basis point mark for the first time since mid-2011 last week.

Portuguese bonds outperformed with 10-year Portuguese yields falling 10 basis points to 5.60 percent.

“Portugal, we think, remains cheap on a cross-market basis compared to some of the other peripherals so there does seem to be reasonable demand for it,” a second trader said.

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