Bunds pulled lower by Treasuries’ sell-off

By Emily Flitter

LONDON (BestGrowthStock) – German government bonds slipped on Wednesday in light trading following a sell-off in U.S. Treasuries sparked by Tuesday’s poorly-bid auction of five-year Treasury notes.

Volume remained light enough that analysts were reluctant to assign too much meaning to the move in Bunds.

“We opened materially lower on the back of the sell-off in Treasuries and we’ve traded in a range since then,” said Havinder Sian, rate strategist at RBS Securities in London.

“The market is effectively waiting for the year-end to see what cash on the sidelines will do in the face of all of the event risk.”

Meanwhile, Italy sold short-term bonds and bills, with yields on both rising from previous similar sales.

Sian said Italy’s sale of 10-year bonds, set for Thursday, would be a more significant event than Wednesday’s auctions. Italian bonds weakened slightly ahead of the auction.

In the U.S., dealers took more than half of Tuesday’s $35 billion Treasury auction, with the high yield at 2.15 percent, 4.

“Bunds are likely to remain in a broad 124.00-126.00 range for the rest of the week with direction coming almost entirely from U.S. Treasuries,” said Everett Brown, bond strategist at IDEAglobal.

“The medium-term trend for both markets is down however, a trend which we think will resume in January with Treasuries underperforming on the way down.”

March Bund futures were 42 ticks lower at 124.77, although above levels seen in after-hours trading on Tuesday.

UBS technical analyst Richard Adcock said a break below 124.36 could see the market move toward December’s low of 123.76.

Two-year German bond yields were half a basis point higher at 0.888 percent, with 10-year yields 3 bps higher at 3.02 percent.

But with many market participants out of the office over the holidays and many investors waiting until the new year to open fresh positions, trading in both core and peripheral euro zone debt was thin.

Peripheral yield spreads narrowed as Bunds bore the brunt of the Treasury-led sell-off, although illiquidity in non-core debt markets exaggerated any moves.

Pressure is expected to resume in the new year on Portugal and other euro zone states struggling to address the debt and banking problems at the heart of the region’s debt crisis.

Italy sold 3.5 billion euros of zero coupon bonds (CTZs) maturing in December 2012 as well as 8.

Yields at the bill auction were around 20 basis points higher than the last sale, while the zero-coupon bond sale attracted only slightly more bids than the amount on offer.

“The CTZs just about got covered but that’s just a reflection of the illiquid markets at this time of year and the fact that it was quite a large sale,” said Credit Agricole rate strategist Orlando Green.

“The bill yields reflect concerns about the credit worthiness of the euro zone periphery.”

(Additional reporting by Kirsten Donovan; Editing by Ruth Pitchford)

Bunds pulled lower by Treasuries’ sell-off