Fri Oct 26, 2012 6:50am EDT
* U.S. earnings, French bank downgrades underpin Bunds
* Data on U.S. growth due later in the day
* Bunds seen sticking to recent tight ranges
* Tentative signs of normalization - but for how long?
By Ana Nicolaci da Costa
LONDON, Oct 26 (Reuters) - Bund futures rose on Friday as lacklustre corporate earnings, downgrades to French banks' ratings and record unemployment in Spain highlighted the pitfalls still facing the global economy.
Results from global giants Apple and Amazon undershot expectations overnight, while in Europe, Renault, Saint Gobain, Gucci and Publicis weighed in with gloomy earnings and outlooks, putting downward pressure on European stocks.
Standard & Poor's cut the rating of French banks including BNP Paribas - a stark reminder of the problems still besetting the euro zone's second largest economy - but French yields showed little reaction.
The bout of negative news whet appetite for safe-haven Bunds but they were seen trading within recent tight ranges ahead of U.S. third quarter gross domestic product (GDP) data later in the day.
"Not only the corporate news but the economic data continue to be quite weak," Ricardo Barbieri, strategist at Mizuho said.
Other data showed French consumer confidence fell in October to its lowest level in nine months, while in Italy, manufacturing business morale unexpectedly fell in October due to worsening outlook for order levels.
"Overall I think it's a confirmation that Q4 is highly likely to see a larger contraction in GDP than Q3 and we don't have as yet anything pointing to a recovery in Q1 of next year," Barbieri added.
German Bund futures rose 53 ticks to 140.93 pushing 10-year yields down 5.1 basis points to 1.53 percent.
Borrowing costs over ten years rose as far as 1.625 percent in the previous session but market participants say there tends to be buying above 1.60 percent.
"When we get to bond yields above 1.6 (percent) there is clearly interest in extending positions in Germany," Barbieri said referring to the practice of buying longer-dated bonds.
U.S. growth is expected to have picked up to an annualised 1.9 percent from 1.3 percent in the previous quarter, according to a Reuters poll.
But even such a rise would not be considered enough to make much of a dent in unemployment, leaving in place doubts about the economy that have underpinned safe haven bonds and kept the Federal Reserve buying Treasuries.
French 10-year yields fell 1.6 bps to 2.13 percent.
HOUSE OF CARDS? Promises of European Central Bank support, should a country like Spain ask for aid, has been a key factor keeping sovereign debt of both triple-A rated and lower-rated issuers in tight ranges.
Investors have been reluctant to make big bets, for fear of being caught off guard should Spain seek help and trigger the ECB's bond-buying program.
This prospect has also contributed to tentative signs of normalization in sovereign debt markets.
The funding costs of both Spain and Italy have come down sharply, and data from the European Central Bank on Thursday showed consumers and firms put money back into Spanish and Greek banks in September. There are also budding signs that foreign investors are venturing back to the Spanish sovereign debt market.
As one trader this week put it, the market is "healing": "Liquidity is coming back, liquidity meaning the market can digest larger customer repositioning and flows again," he said.
But Spanish 10-year yields were higher on Friday, rising 4.8 basis points to 5.67 percent as data showed one in four Spanish workers were without a job in the third quarter of this year.
The data highlights the extent to which the recent improvement in Spanish debt markets is based on expectations rather than fundamentals. The grim reality is that Spain for some time to come will remain firmly in the grip of a recession which has undermined its efforts to stabilise public finances.
"That we've seen a little bit of improvement is really built on the assumption, on the expectation that there will be an aid request, that the ECB will start buying bonds and the ESM (euro zone rescue fund) will start buying bonds in the primary market," Elwin de Groot, senior market economist at Rabobank said.
"But it's all in the assumption that it will happen and if there is a risk that it won't happen, then you could easily see the vicious circle return in the market and that's the risk."
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