Bunds hold on to gains before flood of U.S. data

October 21, 2013

By Marius Zaharia

LONDON, Oct 21 (Reuters) - German Bunds held on to last week's gains on Monday, as investors braced for a flood of data releases that will show the state of the U.S. economy before a likely growth-stifling government shutdown.

A deal last week to lift the U.S. debt ceiling and avoid default reopened the U.S. government after a two-week shutdown, a period analysts said was long enough to hurt business and consumer confidence and weigh on growth.

The government's reopening paved the way for the release of a series of September economic data, which had been delayed.

The main focus will be on Tuesday's release of the September non-farm payrolls figure, a report initially scheduled for Oct. 4. Monday sees the release of housing market data.

Some in the markets are expecting even the September data to show the economy recovering more slowly than anticipated earlier this year. But even if the numbers were better than forecast, expectations of poor October indicators would linger.

"The danger is that the data shows a slowdown even before (the shutdown) ... The market's read is that it is going to slow down (Federal Reserve bond-buying) tapering," one trader said.

Bund futures were 11 ticks lower at 139.94, having risen more than a point since the U.S. debt deal late on Wednesday. Cash 10-year German yields rose 1 basis point to 1.846 percent.

"The market reaction to the data will be asymmetrical. Weak payrolls would suggest the U.S. economy slowed down even before the shutdown. If we get a strong number, markets will look through it," said Richard McGuire, senior rate strategist at Rabobank.

The last-minute U.S. deal only funds the government until Jan. 15, raising worries there could a new round of growth-capping political brinkmanship at the turn of the year.

McGuire added that expectations the Fed could delay its plans to reduce monetary stimulus were supportive for both safe-haven and risky assets.

Lower-rated euro zone debt was a touch stronger on Monday.