EURO GOVT-Caution before US election, Greek vote hobbles Bunds

Tue Nov 6, 2012 4:18am EST

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* Bunds inch up before U.S. election

* Reaction seen muted and short-lived

* Greek austerity vote keeps investors wary

By Kirsten Donovan

LONDON, Nov 6 (Reuters) - Low-risk German government bonds edged up, with investors wary of placing big bets before Tuesday's close-run U.S. election and a Greek parliamentary vote on crucial austerity measures.

Polls indicate the race between President Barack Obama and Republican challenger Mitt Romney will be very close with the risk of a change in fiscal and monetary policy in the world's largest economy keeping investors on the sidelines .

Bunds are likely to be buffeted by any moves in U.S. Treasuries in the wake of the election, although concerns related to the euro zone debt crisis will remain the main driver of the market.

Some analysts say a win by Obama would be positive for U.S. government debt, with U.S. Federal Reserve Chairman Ben Bernanke perhaps staying on beyond the January 2014 when his term expires, while a Romney win could be positive for stocks, helped by business-friendly policies and tax cuts.

"The worse case would be an uncertain outcome over who the next president will be... that would be positive for the likes of Bunds," said Gary Jenkins, director of Swordfish Research.

"If we get a definite victory for either opponent, it may not make a huge amount of difference to Europe in the short-term. Europe has got its own problems."

December Bund futures were three ticks higher at 142.16 after rallying on Monday.

"There doesn't seem to be massive positioning either way before the election," a trader said.

"The feeling is that if Obama wins, it's going to be fairly dovish from the Fed point of view but I'm not sure we're going to see major moves either way," he said, adding that while Bunds traded above 142.00, markets would look for more gains.

In Europe, the focus was on Greece as another make-or-break parliamentary vote loomed on austerity measures required to secure further aid to keep the country afloat.

This pushed two-year German bond yields into negative territory on Monday for the first time in two months.

They were last down half a basis point at -0.015 percent , with the 10-year equivalent down almost 1.5 basis points at 1.42 percent.

However, EU Economic and Monetary Affairs Commissioner Olli Rehn said on Monday that international lenders and Greece were on track to reach a deal to unfreeze the emergency lending at a meeting of euro zone finance ministers on Nov. 12 .

The renewed demand for lower-risk assets seen this week will be supportive for Austria's sale of 1.3 billion euros of 2019 and 2022 bonds on Wednesday, analysts said.

Spanish yields were steady after rising since Friday when Madrid surprised markets by announcing the launch of a new five-year benchmark bond this week, as well as a tap of a 2032 bond -- its first attempt to sell debt with a maturity of more than 10 years since July 2011.

Dealers typical try and cheapen the paper - or build a concession - before sales.

"We might see a little bit more concession building ahead of Thursday but most of it has probably been done now," the trader said.

Rabobank rate strategists said 10-year Spanish yields at their current 5.77 percent were at a "technically interesting juncture", having broken above a downward trend channel and now testing resistance from a longer-term trend line which began in March.

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