July 17, 2013 / 8:02 AM / 4 years ago

Steady euro zone bonds brace for Bernanke's balancing act

* Bernanke expected to reiterate recent message

* Market reaction seen unpredictable

* German yields off highs hit in late June, could fall further

By Ana Nicolaci da Costa

LONDON, July 17 (Reuters) - Euro zone government bonds were steady on Wednesday as investors refrained from placing big bets before testimony to Congress by Federal Reserve Chairman Ben Bernanke.

Concerns over when the U.S. central bank may start withdrawing monetary stimulus has unnerved financial markets in recent months. They will be looking to the Fed chief for any indication of when the tapering may start.

Bernanke is expected to balance a message of enduring central bank support for the U.S. economy with a reminder that the Fed’s ultra-easy policies cannot last forever.

Market reaction is hard to predict given recent erratic moves, analysts said.

“The market is not expecting any dramatic change in terms of tone from Bernanke,” said Padhraic Garvey, head of investment grade debt strategy at ING.

“If you look at what he said over the past few weeks, the man is still dovish ... and there is a lot contingency attached to the tapering off talk which the market just seemed to ignore, so it depends on what the market wants to listen to today.”

Bernanke sparked a brief but fierce global market sell-off last month when he outlined plans to reduce the quantitative easing programme, and he has joined a slew of Fed officials since then who have spelled out their intention to keep interest rates near zero well after the asset purchases end.

German Bund futures were virtually flat at 143.66, as the market also braces for up to 4 billion euros of 10-year German paper to be auctioned later in the session.

Ten-year German yields were unchanged at 1.56 percent. They have come down 29 basis points from more than one-year highs in late June but are still well off this year’s lows of 1.153 percent hit in May.

“In the U.S., yields have come off their highs but not very much, so I suspect the market is still a bit short going into that speech, which would mean that if Bernanke is very dovish ... then we can get further reaction down in yield terms of the Treasuries and by association also for the Bund,” KBC strategist Piet Lammens said.

Elsewhere in the euro zone, lower-rated debt was also unchanged, despite rising political risks in Portugal and Spain.

Ten-year Spanish yields were flat at 4.66 percent, as investors shrugged off political troubles.

Spain’s opposition Socialists said on Tuesday they would call a symbolic vote of no-confidence against Prime Minister Mariano Rajoy if he refused to appear before Parliament to answer questions about a deepening scandal over party financing.

Meanwhile, a political crisis in Portugal looks increasingly likely to derail the sovereign’s plans to exit its international bailout next year.

The spread between 10- and five-year bond yields was at its tightest since the middle of last year, in a sign of investor concerns about the sovereign’s credit quality.

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