German Bunds hit three-week highs on U.S. growth concerns


* German Bunds extend gains on weak non-farm payrolls

* Focus turns on upcoming European business surveys

* Strong euro may limit any Bund pull-back

By Marius Zaharia

LONDON, Oct 23 (Reuters) - German Bund futures hitthree-week highs on Wednesday, extending gains on the back ofTuesday's below-forecast U.S. jobs data, which raisedexpectations the Federal Reserve would delay trimming stimulus.

The numbers showed recovery momentum in the U.S. economy wasweaker than expected even before October's 16-day governmentshutdown caused by a political spat over the budget and thepublic borrowing limit.

An 11th-hour deal to lift the debt ceiling allowed thegovernment to re-open but provided funds only until Jan. 15,raising the prospect of another budget battle early in 2014.

The political uncertainty is expected to have a detrimentalimpact on growth and therefore prompt the Fed to hold off onplans to scale back its $85 billion monthly purchases ofTreasuries and mortgage-backed securities.

Before the shutdown, expectations for when the Fed might"taper" its bond-buying tilted towards the end of the year, buthave since been pushed back to early 2014. The September jobsreport has cemented those expectations.

"The market is still digesting the non-farm payrolls ... Thedata is favouring a delay of (Fed) tapering," said FelixHerrmann, market strategist at DZ Bank in Frankfurt.

Bund futures were last 16 ticks higher at 140.70,having earlier hit a three-week high of 140.84. They have risenalmost two points in the past week.

Cash 10-year German yields fell to theirlowest since early October at 1.769 percent.

"The bond market momentum has picked up," said Jan vonGerich, chief analyst at Nordea in Helsinki. "We're not even atSeptember lows so German yields can fall further today."

Last month's low in Bund yields was 1.694 percent.

A sale of German 30-year bonds had limited market impact asit received bids above market prices, easing concerns about adrop in demand.


October jobs data on Nov. 8 may give markets a better ideaabout the impact of political uncertainty on the U.S. economy,but until then, the focus may turn back to Europe.

Euro zone manufacturing and services PMIs are due onThursday followed by the German Ifo business sentiment survey on Friday.

Von Gerich said neither was likely to knock Bunds lower.

Weak numbers would suggest the euro zone recovery was alsolosing momentum, enhancing the appeal of top-rated German debt.But good numbers might further strengthen the euro currency,raising the risk of policy easing by the European Central Bank.

"I would have thought a strong euro would bring inflationeven lower, raising chances for a policy reaction," one tradersaid. "It's a potential supporting factor for Bunds."

The euro is trading at two-year highs against the dollar, while euro zone inflation was 1.1 percent in September,way below the ECB's target of close to 2 percent.

Spanish bonds outperformed other peripheral debt after datashowed Spain escaped a lengthy recession in the third quarter.Spanish 10-year yields fell 3 basis points to 4.19percent.

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