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

By Marius Zaharia

LONDON, Oct 23 (Reuters) - German Bunds hit three-week highs on Wednesday, extending gains on the back of the previous session's below-forecast U.S. jobs report, which raised expectations the Federal Reserve could delay trimming stimulus.

The data showed the momentum in the U.S. economic recovery was weaker than expected even before October's 16-day government shutdown caused by political wrangling over the budget and the public borrowing limit.

A last-minute deal to lift the debt ceiling a week ago reopened the government, but provided funds only until Jan. 15, raising the prospect of another budget battle early next year.

The political uncertainty is expected to have a detrimental impact on the economy and therefore prompt the Fed to hold off somewhat on plans to scale back its $85 billion monthly purchases of Treasuries and mortgage-backed securities.

Before the shutdown, expectations for when the Fed might start to rein in bond-buying tilted towards the end of the year, but have since been pushed back to early 2014. The September jobs report has cemented those expectations.

"The tapering fear is being pushed back," one trader said.

Bund futures were last 11 ticks higher at 140.65, having hit a three-week high of 140.71 minutes after the open. They have risen almost two full points in the past week.

Cash 10-year German yields fell to a two-week low of 1.784 percent.

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

The September low in Bund yields was 1.694 percent.

October jobs data, due on Nov. 8, may give markets more of an idea about the broader impact of the 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 on Thursday and the German Ifo business sentiment survey is due on Friday.

Von Gerich said neither was likely to knock Bunds lower.

Weak numbers would suggest the euro zone recovery was losing momentum as well, enhancing the safe haven appeal of top-rated German debt. But strong numbers might strengthen the euro currency even further, raising the risk of further policy easing by the European Central Bank.

"I would have thought a strong euro would bring inflation even lower, raising chances for a policy reaction," the trader said. "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.

Other euro zone bonds were also slightly firmer.