By Marius Zaharia
LONDON, Dec 27 (Reuters) - German Bunds fell on Friday as further signs of improvement in the U.S. economic outlook reinforced expectations that the Federal Reserve will steadily withdraw its bond-buying stimulus next year.
Data on Thursday showed a fall in U.S. jobless claims and a rise in holiday retail sales, prompting more weakness in Bunds and Treasuries, which have been under selling pressure since the Fed said last week it would start trimming asset purchases in January.
Bund futures were last 61 ticks lower at 139.14. In the United States, 10-year T-note yields briefly broke above 3 percent, having risen more than half a percentage point in the past two months.
'Better data in the U.S. is spilling over into Europe,' said Olle Holmgren, an analyst at SEB.
Thin trading volumes due to the year-end holidays exacerbated market moves. Roughly half-way into the European trading session, the turnover in Bund futures was 90,000 lots, a fraction of a daily average of about 680,000 lots. One lot represents 100,000 contracts.
The 3 percent level in U.S. T-note yields was last hit in September on anticipation that the Fed could start trimming its asset purchases. Prior to that, the level was last reached back in mid-2011 just before the euro zone crisis escalated, prompting investors to buy assets perceived as safe havens such as Treasuries and Bunds.
With the euro zone crisis abating and the U.S. recovery seemingly gathering speed, some analysts predict U.S. yields will rise further next year.
'In the United States I think yields could continue to grind higher, especially if data continues to improve,' said Anders Svendsen, chief analyst at Nordea.
'But there's a huge difference between the U.S. and the euro zone. In the euro zone we need more confirmation that the recovery is on track before we see Bund yields significantly above 2 percent.'
Svendsen also said the European Central Bank would attempt to support the economic recovery by being 'extremely dovish' in a bid to decouple euro zone yields from their U.S. peers.
Italian 10-year yields were 3 basis points higher at 4.21 percent as investors made room in their books for the last debt sales of the year.
Italy sold 8 billion euros of six-month bills and 2.6 billion euros of two-year, zero-coupon bonds in an auction that saw its borrowing costs creeping higher compared with previous sales, mainly due to a seasonal fall in demand.
On Monday it will offer up to 5.5 billion euros of five- and 10-year bonds.
(Reporting by Marius Zaharia; Editing by John Stonestreet and Gareth Jones) Keywords: MARKETS BONDS EURO
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