EURO GOVT-Bunds up on Fed QE prospects, periphery pressured

* Bunds rise ahead of Fed, curve flattens from long-end

* Ireland leads periphery wider

* Germany sells 5-year bonds; Portugal T-bills

(Updates with auctions to midsession)

By Kirsten Donovan

LONDON, Nov 3 (BestGrowthStock) – German government bonds rose on
Wednesday, helped by worries over the euro zone periphery and
investors betting the U.S. Federal Reserve would not disappoint
with an expected announcement of further quantitative easing.

Bunds have settled comfortably back below key psychological
levels — 2.5 percent and 3 percent in 10-year and 30-year
yields respectively — on uncertainty over the scale of any Fed
action. At the same time, the euro zone periphery has come
under pressure as the implications of a possible new permanent
mechanism for euro zone debt crisis resolution hit home.

Analysts predict the Federal Reserve, which ends a two-day
meeting on Wednesday, will buy assets worth around $100 billion
a month for five months with an open mandate to purchase more.
“The optimism that the Fed will accommodate the market is
spilling over into Bunds and can be expected to continue if
Treasuries enjoy a bit of a short-term rally after the
announcement,” said IDEAglobal strategist Everett Brown.

“Bunds are also gaining a bit from a flight to quality
within the euro zone market.”

The outcome of the U.S. central bank’s policy meeting and
its decision on QE are due at 1815 GMT.

At 1123 GMT, December Bund futures (FGBLc1: ) rose 31 ticks
higher at 130.09. Two-year bond yields (DE2YT=TWEB: ) fell 1.2
basis points to 0.982 percent, with 10-year yields (DE10YT=TWEB: )
3 bps lower at 2.45 percent and 30-year yields (DE30YT=TWEB: )
down 5 bps, flattening the 10/30-year yield curve to its least
since late 2008 at 45 bps.

Traders noted the flattening bias seen over the last two
days as market players took off curve steepening positions.


The latest sharp sell-off of Irish, Portuguese and other
riskier euro zone bonds began on Friday after EU proposals on
debt restructuring raised the possibility of bondholders having
to share the burden in a default. [ID:nLDE69R1FF]

Ireland led peripherals wider with 10-year yields rising to
close to 7.6 percent, pushing the spread over Bunds above 515
bps for the first time, while the cost of insuring against a
default based on 5-year CDS prices hit a new high at 548 bps.

Portuguese bonds were also underperforming with the yield
spread six basis points wider at 393 basis points. Lisbon sold
1.03 billion euros in two bill issues on Wednesday, slightly
more than the initially indicated offer, with yields rising from
the previous sale [ID:nLIS002495].

“It’s a bit early to say but it (the yield moves) could be
triggering a renewed debt crisis within the euro zone, which
leaves Germany as the standout safe-haven,” IDEA’s Brown said.

He said, however, that Bund gains would be restrained by
upwards pressure on yields as the European Central Bank moves to
regain control of liquidity in the banking system.

Portugal’s parliament is due to vote on the general
guidelines of the 2011 budget bill after the minority government
hammered out a deal last week with the opposition, although news
of the deal has failed to support the country’s bonds.

“Even though the yield levels were higher than the previous
auctions in these maturities, due to the flight-to-quality
environment, this was a potential banana skin avoided,” said
Credit Agricole rate strategist Orlando Green

The yield on Portugal’s March 2011 T-bill (PTEGE0011=TWEB: )
had risen more than 30 basis points in the last week or so to
three-week highs above 2 percent ahead of the sale.

Germany also sold 4.1 billion euros of five-year bonds

Ahead of the Fed’s decision, markets will digest the U.S.
private sector ADP employment report along with ISM services
data [MI/DIARY].

(Editing by Patrick Graham)

EURO GOVT-Bunds up on Fed QE prospects, periphery pressured