EURO GOVT-Greece and growth worries support safe haven Bunds

Fri Nov 9, 2012 7:24am EST

Related Topics

* Bunds extend recent gains as Greece aid saga drags on

* French data hints at growing economic malaise in euro zone

* Looming U.S. fiscal cliff to support Bunds in medium term

By William James

LONDON, Nov 9 (Reuters) - German bonds rose on Friday, building on the week's sizeable gains as Greece's debt problems neared boiling point and with economic growth in the euro zone and United States under threat.

Greece will vote on the country's 2013 budget on Sunday, the next big hurdle towards unlocking access to urgently needed international aid after Wednesday's tight vote in favour of an austerity package worth 13.5 billion euros.

However, euro zone finance ministers were unlikely to sign off on the next tranche of aid for Greece at a meeting on Monday, according to a senior EU official.

That left Greece mulling the idea of rolling over a 5 billion euro repayment next week because it did not have enough cash to redeem the treasury bill outright.

"I think the vote goes through on Sunday but with Greece we're looking bigger picture, aren't we? There's a lot of supportive factors out there, and it's one-way trade today backed by real money buying," a trader said.

Bund futures rose 35 ticks on the day to 143.33, adding to gains of more than a point since last Friday's close.

The 10-year yield slipped 3 basis points on the day to 1.33 percent, approaching the late August low of 1.3 percent. Beyond that level, traders cited resistance at 1.27 percent - the 23.6 percent retracement of a major selloff seen in the first half of the year.

HEADED FOR THE CLIFF

The rise in low-risk Bunds gained momentum after data underlined that poor economic growth in the euro zone was spreading to the region's larger states.

Data on Friday showed industrial production in France, the euro zone's second-largest economy, shrank by more than forecast in October and the country's central bank said it expected to slip into recession at the end of 2012.

In recent days, both the European Commission and the European Central Bank have acknowledged a worsening outlook for the euro zone's struggling economy.

Outside the euro zone, the safety bid has also been fuelled by the re-election of Barack Obama as U.S. president and the risk that politicians will be unable to negotiate a way around $600 billion in spending cuts and tax hikes which could extinguish growth in the world's largest economy.

Market participants said the likelihood of protracted wrangling should maintain demand over the medium term for less risky, "core" bonds as a shelter from the uncertainty.

"Looking at the next few weeks we would expect both Bunds and U.S. Treasuries to trade supported at about current levels," said Rainer Guntermann, strategist at Commerzbank in Frankfurt.

"Obviously the fiscal cliff is the big issue and over here in Europe we have economic weakness coming through in the core countries."

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