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Bund rally pauses on caution before euro zone manufacturing data

By Emelia Sithole-Matarise

LONDON, Oct 24 (Reuters) - German Bund futures held on to the previous day's gains on Thursday before euro zone manufacturing surveys that are expected to show the tentative recovery in the region's economies remains on track.

The euro zone data follows flash Markit/HSBC Purchasing Managers Index (PMI) numbers for China, the world's second biggest economy, which rose to a seven-month high in September.

German flash manufacturing PMI at 0728 GMT is expected to rise to 51.5 in October from 51.1 in the previous month. The euro zone's PMI numbers, due at 0758 GMT, are seen up at 51.4 this month from 51.1.

Bund futures were 5 ticks lower at 140.81, staying within sight of a three-week high of 140.91 hit on Wednesday in the wake of weak U.S. payrolls numbers which bolstered expectations the Federal Reserve will maintain its stimulus into next year.

"If the PMIs come in stronger you'll see a moderate selloff but we think the U.S. picture is going to underpin fixed income even in Europe so there's limited downside for Bunds," a trader said.

German 10-year yields were flat on the day at 1.77 percent and some strategists said they could move lower especially if the PMIs miss forecasts or U.S. data worsens.

Other euro zone bonds also held steady.

"We think the economic data in the euro zone should confirm the trend we have seen of late (of tentative recovery) but should the data in the U.S. be really bad that could change the situation," said Mathias van der Jeugt, a strategist at KBC.

"Where we are now we believe that, short term, the support should hold in German yields in the 1.73-1.74 percent area."

The market will keep a close eye on U.S. first-time claims for jobless benefits for the week ended Oct. 19 at 1230 GMT, with economists forecasting a total of 340,000 new filings, against 358,000 in the previous week.

U.S. flash manufacturing PMI for October, due at 1258 GMT, is seen at 52.5, slightly down from 52.8 in the final September report.