EURO GOVT-Greek, U.S. uncertainty keeps Bunds near 2-month highs

Mon Nov 12, 2012 11:55am EST

Related Topics

* EU finance ministers unlikely to OK Greek aid release

* Euro zone GDP growth data to confirm slowdown

* Bunds seen keeping close to two-month highs

By Emelia Sithole-Matarise and Marius Zaharia

LONDON, Nov 12 (Reuters) - German bonds were steady near two-month highs on Monday as uncertainty over the outcome of talks on financial aid for Greece and a potential U.S. fiscal crisis kept markets nervous.

Euro zone finance ministers were in a meeting to discuss Greek progress on controlling its debts but they were not expected to release a new tranche of funding despite Athens approving a tough 2013 budget on Sunday.

Greece's lenders were expected to give the country two more years to reach its goals. The sticking point was how to make its debts sustainable.

German Bunds were seen remaining near current levels for as long as the situation remained unresolved.

On Monday, 10-year yields were flat at 1.34 percent, while Bund futures were 5 ticks higher on the day at 143.19, having risen as high as 143.47 on Friday, their highest since early September.

"The market is waiting to see when or whether Greece is going to get some more money," said Niels From, chief analyst at Nordea in Copenhagen.

From said the signals coming from euro zone leaders were "pretty constructive", so Bunds may look "pricey" at current levels and more bad news was needed to push Bund yields below last week's lows around 1.30 percent.

He added, though, that room in the opposite direction was also limited. Risks were not only related to Greece, but also to the automatic spending cuts and tax rises that might kick in in the U.S. next year.

Athens has to redeem 5 billion euros worth of treasury bills on Nov. 16 and had been counting on cash from the next aid tranche to help cover that. That has left it with not much choice but to roll over the bills.

A senior debt agency official said Tuesday's one- and three-month bills issuance should be fully-funded , but markets took little comfort from those comments.

"Greece has said they'll get enough money to cover the 5 billion maturing bills this week but there's still an unknown hanging over the market on when the Eurogroup is going to approve the aid," a trader said.

U.S. BUDGET BATTLE

Investors are closely monitoring talks between President Barack Obama and the Congress on a fiscal deal to avert a $600 billion package of automatic tax hikes and spending cuts next year that could send the U.S. economy back into recession.

That possibility and the ripple effects it could have on the already-battered euro zone are likely to keep U.S., German and other top-rated government debt supported.

"Whilst there's uncertainty remaining on Greece and the United States, core government bonds will remain underpinned but I think 10-year Bunds at these levels look pretty rich," Nick Stamenkovic, strategist at RIA Capital Markets, said.

"Near term we could see Bund yields test the 1.30 level but at those sort of levels investors will be reluctant to push the yield significantly lower unless we see signs of significant disagreement in the U.S. and/or problems with financing in Greece," Stamenkovic said.

Gross domestic product data from Germany, France and Italy this week is widely expected to confirm a slowdown in the euro zone's leading economies and may also support safe-haven assets.

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