EURO GOVT-Bunds rise after U.S. credit rating threat

LONDON, July 14 Thu Jul 14, 2011 2:12am EDT

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LONDON, July 14 (Reuters) - Bund futures rose on Thursday as demand for AAA-rated German debt increased after Moody's said the United States could lose its top-notch credit rating unless policymakers agree to raise the country's borrowing limit.

Concern about the euro zone's own problems also grew over delays to policymakers' plans to discuss the region's deepening debt crisis and after Greece's credit rating was downgraded late in the previous session.

The fresh blows to already-fragile market sentiment came ahead of a closely-watched bond auction from Italy which will be a key indicator of whether recent heavy pressure on the country will affect appetite for new debt issues.

Bund futures FGBLc1 were 32 ticks higher at 128.67. On Tuesday they reached their highest since November at 130.91.

"(U.S.) Treasuries seem to have shrugged off the debt warning so far which is a bit surprising. In theory Bunds should outperform, but we're somwhat at the whim of periphery there so it makes it hard to call," a trader said.

Fitch Ratings on Wednesday downgraded Greece deeper into junk territory, citing the absence of a new and fully funded financing program for the country.

Meanwhile euro zone ministers, who had been expected to meet on Friday, were now unlikely to meet until next week to discuss Greece's new bailout deal and the thorny issue of how to inflict some of the cost on private bondholders.

Italy will auction five- and 15-year benchmark bonds along with taps of two off-the-run lines for a total of up to 5 billion euros.

The sales have gained significance due to mounting market concerns over the cost of financing the country's large public debt after 10-year yields briefly topped 6 percent this week.

Although some tension around Italy has eased, political uncertainty over new deficit-busting steps has dragged the euro zone's third largest economy into the firing line of investors.

"We would not be surprised to see further concessions into the supply itself, while Italy accessing the markets should help confidence and act as a catalyst in terms of support for BTPs post the auction," Barclay's Capital said in a note. (Reporting by William James)

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