EURO GOVT-Bunds edge higher, 2011 supply worries fester

* Bunds shed losses as focus shifts to 2011 supply hurdles

* 2-/10-year yield spread holds gains after ECB liquidity op

* Technical outlook bearish for Bunds despite recent gains

* North Korea “holy war” threat sees no flight to quality

By William James

LONDON, Dec 23 (BestGrowthStock) – Bund futures shed early losses
and yields ticked lower on Thursday with bond market concerns
over a renewed bout of pressure on the euro zone’s weaker states
keeping safe-haven debt supported despite rallying stocks.

The Bund future (FGBLc1: ) was 18 ticks higher at 125.66 and
traded volumes in both core and peripheral euro zone government
debt were low with a well-below-average 100,000 March Bund
futures contracts exchanged by 1200 GMT.

Euro zone sovereigns such as Spain and Portugal, under
pressure because of perceived banking weakness and deficit
problems, will face challenging market conditions when debt
issuance restarts in January to cover maturing bonds.

“We’ve got a number of peripheral issuers that have to come
to the market and there’s nervousness around that – these are
event risks. The move that we see is not big but it stems from
that sovereign tension,” said Orlando Green strategist at Credit
Agricole in London.

Traders said a threat from North Korea, which warned of a
“holy war” with the South, using its nuclear deterrent, was not
causing flight-to-quality flows into German debt. [ID:nTOE6BL01]

The 10-year German Bund (DE10YT=TWEB: ) yielded 2.933 percent,
down 2.4 basis point on the day while the two-year Schatz yield
(DE2YT=TWEB: ) fell by 5.6 bps to 0.9 percent.

Banks borrowed around 20.5 billion euros at the European
Central Bank’s 13-day tender to cover 200 billion euros of
expiring loans. The take-up, along with Wednesday’s 150 billion
euro demand for 3-month funds, was enough to ensure ample
liquidity and suppressed money market rates into 2011. [MMT/]

The 2-/10-year German bond yield spread widened to 203 bps,
extending a widening seen in the previous session when
larger-than-expected demand at Wednesday’s tender saw two-year
debt outperform.


In recent sessions Bund futures have regained some of the
large losses seen since November, posting a more than 100-tick
gain from last Friday’s close, but the outlook remains bearish,
according to technical charts.

The Moving Average Convergence-Divergence indicator, which
measures market momentum, remains firmly below the zero level.

“(This suggests) strength continues to be limited in time
and extent, offering selling opportunities at higher levels,
against what is still a longer-term bearish trending condition,”
said Richard Adcock, technical analysts at UBS.

There was more bad credit ratings news for the euro zone as
Standard and Poor’s lowered its outlook for Slovenia’s foreign
currency credit to negative late on Wednesday. [ID:nN22109688]

A string of negative ratings actions in recent weeks has
kept investors wary of taking on debt from the euro zone’s
higher yielding states.

(Reporting by William James; editing by Nigel Stephenson)

EURO GOVT-Bunds edge higher, 2011 supply worries fester