REFILE-ANALYSIS-ECB's foot-dragging to benefit Bunds ultimately

(Refiles to add word 'pound' to 13th paragraph and 'pounds' to 14th paragraph)

By Kirsten Donovan

LONDON, April 20 (Reuters) - Euro zone government bonds have underperformed U.S. and UK debt due to the European Central Bank's reluctance to adopt the sort of quantitative easing used elsewhere but they should fare better in the next 12 months.

For one thing, economic recovery could be slower to take hold in the euro zone because the ECB has dragged its feet on unconventional easing, and that is expected to mean that euro zone interest rates will have to stay lower for longer -- capping euro zone bond yields.

Moreover, countries that have gone down the path of printing money to shore up growth are expected by analysts to be the focus of concerns about eventual price pressures and see their bond markets underperform.

While the prices of longer-dated UK gilts and U.S. Treasuries have risen as the Bank of England and Federal Reserve effectively act as guaranteed buyers of government bonds, they risk sharp reversal once the central banks leave the market.

"It looks like the European Central Bank will continue to drag its feet compared to the Fed and BoE and that on balance should help Bunds relative to Treasuries in the medium term," said Nick Stamenkovic, rate strategist at RIA Capital Markets.

"The ECB at the very least will cut the refi rate to 1 percent next month ... but it looks unlikely they'll follow the path of the Fed and BoE by pursuing QE, consequently inflation fears are likely to remain heightened in the U.S. and UK relative to the euro zone."

Investors must wait until next month to see what alternative policy measures the ECB adopts, but the view is that outright purchases of sovereign bonds are highly unlikely, not least due to the logistical difficulties in carrying that out.

The different policy approaches have seen the yield premium offered by gilts relative to Bunds fall to close to zero from around 50 basis points in early March before the BoE announced plans to purchase up to 75 billion pounds of gilts over a three-month period.

Similarly, the yield premium Bunds offer over Treasuries has widened around 20 basis points to 34 basis points as U.S. debt outperformed and yields fell after the Fed announced its own $300 billion Treasury-buying scheme.

"Certainly for the near term at least, we think the money printers have scope for outperformance," said Nomura rate strategist Sean Maloney. But longer term, the outlook is rather different.

"Like any sort of monetary easing, if QE works it should stimulate the economy and ultimately put bond yields up longer term, not down, so you have a conflict between short and long term," said Morgan Stanley rate strategist Laurence Mutkin. Relative to the size of their respective government bond markets, the BoE's 75 billion pound QE programme is seen as a shorter, sharper shock than the Fed's $300 billion programme.

Morgan Stanley estimates that by June the BoE will have purchased 27 billion pounds more Gilts than the UK Debt Management Office will have issued.

"We suspect that as we get towards June, the Gilt market will get nervous its biggest buyer is going to evaporate," said Calyon rate strategist David Keeble.

"Gilts are trading flat to Bunds at the moment which isn't sustainable given the UK economy looks to be so far ahead in its recovery than the euro zone which seems to be lagging the whole economic cycle."

HIGHER YIELDS AHEAD

Bunds are expected to underperform their U.S. and UK counterparts on a six- to 12-month horizon, according to a Reuters poll which asked fixed income strategists where they saw U.S., European and UK 10-year bond yields over this period. The yield spread between 10-year gilts and 10-year Bunds is seen widening to 15 basis points in six months time and 30 basis points in one year as gilt yields are forecast to rise faster then Bund yields. The 10-year T-note/Bund spread is seen narrowing to 20 basis points in six months and 10 basis points in 12 months as currently lower yielding Treasuries underperform.

Certainly analysts don't see a protracted period of low government bond yields as was the case after Japan's ill-fated attempt at QE at the start of the decade as governments and central banks have been much quicker to leap into action during the current crisis.

Against this back drop, investors will find it even more crucial to differentiate between the main government bond markets as the effect of government and central bank stimulus programmes begins to be felt.