EURO GOVT-Bunds steady ahead of ECB decision

Thu Nov 8, 2012 4:21am EST

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* ECB expected to keep rates unchanged, no steer on Spain aid

* Spanish yields flat before bond auction

* Focus on level of demand for long-dated Spanish bonds

By Emelia Sithole-Matarise

LONDON, Nov 8 (Reuters) - German Bund futures held near two-month highs on Thursday, underpinned by investor concerns over a looming U.S. fiscal crisis but activity was seen subdued before a European Central Bank policy decision.

President Barack Obama is facing a political showdown with a divided Congress over the so-called "fiscal cliff" of about $600 billion in expiring tax cuts and spending reductions due to take effect in January.

Some analysts warn the cutbacks could hit the U.S. economy harder than expected, adding to European Commission warnings about anaemic growth in the euro zone and refueling demand for low risk government bonds.

"The global environment has turned favourable for core bond markets and the EU forecasts for next year are rather gloomy, that's why we saw some (peripheral euro zone bond) risk-off moves," Patrick Jacq, a strategist at BNP Paribas, said.

The Bund future was last one tick up at 142.76 compared with 142.75 at Wednesday's settlement, its highest level since Sept. 6 and was likely to remain around there on caution before the ECB's rate decision.

The central bank is expected to leave interest rates on hold at a record low 0.75 percent but comments by President Mario Draghi on Wednesday, on the weak growth outlook, as well as gloomy forecasts from the European Commission have raised speculation that the ECB may signal more willingness to ease in the next few months.

German 10-year yields were unchanged on the day at 1.38 percent.

"As much as the ECB won't do anything today you've got to think that given the way the data is going we're certainly looking for a rate cut before the end of the year," a trader said.

Traders and strategists expect little steer from Draghi at his post-meeting press conference on Thursday on the ECB's new bond purchase scheme before a decision by the Spanish government to request euro zone aid. Such a request would trigger central bank intervention.

Before the ECB policy decision, market participants' focus will be on a Spanish auction of 3.5 to 4.5 billion euros of bonds including a new five-year bond and 20-year debt - the longest-dated issue to be sold at an auction since mid-2011.

The sale is expected to go smoothly with some bond repayments the previous week expected to be reinvested into the new issuance and after the Greek parliament approved, as expected, austerity measures needed to unlock vital aid and avert bankruptcy.

Spanish 10-year bond yields were flat at 5.72 percent before the auction, which will see Madrid clear its 2012 issuance needs, a move some analysts say could make Prime Minister Mariano Rajoy delay making the aid request.

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