* German Bunds follow UK gilts higher after weak data
* Break through resistance levels fuels Bund rally
* Investors prepare for Italian auction
By Ana Nicolaci da Costa and Emelia Sithole-Matarise
LONDON, March 12 (Reuters) – German Bunds rallied on Tuesday
after breaking key technical resistance as a sharp fall in UK
manufacturing underpinned safe-haven debt markets.
Bunds followed UK gilts after data showed the biggest
contraction in factory output since last June, bolstering
speculation that the Bank of England would increase the target
for its bond purchase scheme to support the economy.
“There has been a breach of the resistance level above 143
or so … so that has basically helped to push the market up,”
Philip Tyson, strategist at ICAP said. “Obviously the UK data
was particularly weak so that will have contributed to it.”
German Bund futures rose 32 ticks on the day to
143.04, pushing 10-year German yields 2.4 basis
points lower to 1.48 percent.
The rise in Bunds also comes before Italy holds a bond
auction on Wednesday, days after Fitch cut its credit rating
While Italy may have to pay more to get its bonds away,
analysts still expect ample liquidity and yield-hungry investors
to support demand at the sale.
Rome sold the planned 7.75 billion euros of bills maturing
in March 2014 at an auction on Tuesday, but one-year borrowing
costs climbed to their highest level since December at the sale.
Italian bonds sold off sharply on the election results but
have since recovered most of those losses. Ten-year Italian
government bond yields were 4.2 basis points lower
at 4.61 percent.
“The fact that the price action has been so positive is not
ideal going into an auction because you would ideally like to
see some sort of concession going into it. But still, I would
have expected to see a reasonable auction,” Tyson added.
Meanwhile, demand at Spain’s short-term bill sale on Tuesday
was so strong that the Treasury later announced an unscheduled
triple-bond auction of long-term debt to take place on Thursday.
The Treasury sold above the top end of the target and
average yields on the six-month paper fell to levels not seen
since Feb. 2012..
The difference in results underscores the relative advantage
Spain has held over Italy over the past month as the euro zone’s
third largest economy faced political uncertainty.
The 10-year yield gap between Spanish and Italian bonds has
narrowed more than 50 basis points since the Italy’s elections
to 14 basis points.
“I do expect political volatility but until we get signs of
that Italy will continue to trade OK. A lot of people are also
looking at relative plays between Spain and Italy and favouring
Spain and I expect that to continue,” one trader said.
EURO GOVT-Bunds rise on UK data, break key technical levels – Reuters