EURO GOVT-Bunds get temporary respite as risk appetite wanes

* Ten-year yields back off key technical level for now

* Further tests of 3.5 pct on Bund, eventual break seen

* UK curve steepest vs euro zone curve since November

* Good demand for Dutch 30-year bodes well for German sale

By Kirsten Donovan

LONDON, April 12 (Reuters) – German Bunds rose on Tuesday,
with 10-year yields temporarily edging away from a key technical
level, supported by a fall in riskier assets after Japan raised
the severity of its nuclear crisis to the highest level.

Bunds were also pulled up by Gilts which rallied after a
weaker-than-expected reading of UK inflation saw markets push
back expectations for a Bank of England rate hike, but the
respite for German debt was likely to be short-lived.

The 3.5 percent level for 10-year Bund yields has held over
the last two sessions, but a break — which is seen as only a
matter of time — would open the way to the 3.70 percent area,
the 61.8 percent retracement of the 2008-2010 fall in yields.

“Beyond the near-term the risk is to break through that
level to the upside,” said Rabobank rate strategist Richard

“But there are complicating factors in that Bunds have
already got a lot priced into them in terms of interest rate
hikes …. so it might not be too easy.”

June Bund futures (FGBLc1: Quote, Profile, Research) were 31 ticks higher at 120.21.

Two-year bond yields (DE2YT=TWEB: Quote, Profile, Research) were down 3 basis points
at 1.888 percent, with 10-year yields (DE10YT=TWEB: Quote, Profile, Research) down 2 bps
at 3.472 percent.

“The market feels heavy and if it wasn’t for Japan we may
have broken through (3.5 percent). It feels like it wants to go
at some point,” said a trader.

Markets are pricing in a 75 percent chance of another ECB
rate hike in June, with a 25 percent chance of a third hike by
year-end (ECBWATCH: Quote, Profile, Research). In contrast, expectations for a first BoE
hike were pushed back to October from August (BOEWATCH: Quote, Profile, Research).

The change of view saw the UK 2/10 year yield and swap
curves steepen as short-dated rates fell, pushing them to their
steepest versus the equivalent euro curves since November with
shorter euro rates pushed higher by ECB rate hike expectations.

“If the market’s view is that the Bank of England is going
to delay a rate rise … then that should give some support to
the short end,” said Nick Stamenkovic, rate strategist at RIA
Capital Markets.

“Whereas in euroland the ECB has already taken action and
… the trend is for a flattening as the risk is the ECB will
hike rates in June.”

Graphic on UK/euro zone 2/10 year swap curve spread

On the supply side, the Netherlands sold 1.5 billion euros
of 30-year bonds (NL44641=: Quote, Profile, Research) [ID:nAAT010322] ahead of a sale of
German 30-year paper on Wednesday.

“It was a sound auction with the recent cheapening of the
bond sufficient to generate some interest,” said Credit Agricole
rate strategist Peter Chatwell of the Dutch sale.
Thirty-year Dutch bonds have underperformed 10-year paper
since the auction was announced in mid-March, steepening the
10/30 year yield curve by around 4 bps, but analysts said the
curve still looked flat by historic standards with the spread
close to its lowest since 2009, according to Reuters data.

The German 30-year sale (DE113543=: Quote, Profile, Research) is also expected to go
well, helped by a relatively small 2 billion euro target size
and the steepness of the German 10/30 curve, which at around 50
bps is the most since early January.

“(That) gives the bond some attractiveness in relative value
terms,” Chatwell said.

“I suspect there will be some interest in switching out of
the off-the-run German 30-year issues, such as the January
2037s, and overall the auction should go well.”

Meanwhile, Greece sold 1.625 billion euros of 6-month
T-bills, seeing the yield rise by 5 bps compared with a previous
March auction [ID:nLDE73B0TY].

Yields of bonds issued by the euro zone’s more indebted
issuer such as Greece and Ireland fell, narrowing the spread
over Bunds, but Portuguese yields rose modestly at the short-end
as officials from the European Commission, the European Central
Bank and the International Monetary Fund discuss technical
details of bailout aid in Lisbon on Tuesday [ID:nLDE73B0JA].
(Editing by Catherine Evans)

EURO GOVT-Bunds get temporary respite as risk appetite wanes