EURO GOVT-Greek, U.S. worries buoy safe-haven Bunds

Fri Nov 16, 2012 12:38pm EST

Related Topics

* Bunds near 2-month highs with investor focus on Greece

* Athens seen getting cash, but no long-term solution

* Start of U.S. budget talks adds to caution

By Emelia Sithole-Matarise and Kirsten Donovan

LONDON, Nov 16 (Reuters) - German government bond prices rose to near two-month highs on Friday, with worries over the size of Greece's debts and the looming U.S. fiscal cliff budget battle spurring demand for low risk debt.

Greece has again taken centre stage in the three-year-old euro zone crisis as its international lenders squabble over how to make its debt manageable, delaying a 31 billion-euro aid payment necessary to keep the country afloat.

Although Athens is expected ultimately to secure the cash and avoid default this year, something which has helped push Greek bond yields lower in recent sessions, analysts and traders say a lasting solution may prove elusive.

Euro zone finance ministers meet again next Tuesday, with IMF Managing Director Christine Lagarde saying a deal should be possible.

But strategists said any deal reached would only be a short-term fix, and with investors also sceptical that the U.S. government and Congress can reach a deal soon to avoid the automatic spending cuts and tax rises which will otherwise be triggered next year, safe-haven bonds are set to extend gains.

"There's a chance Greece is not entirely sorted out by Tuesday and we may have to wait for euro zone leaders' meeting on the 22nd but the noises we're hearing is Greece should be able to get aid," said Gilles Moec, a Deutsche Bank economist.

"We'll probably have an agreement that will deal with Greece in the next few quarters but for a long-lasting solution to emerge we may have to wait until after the German elections in 2013."

The IMF wants a solution that would bring Greek debt down to 120 percent of economic output by 2020 but a senior euro zone source told Reuters this week that finance ministers would only attempt to close the financing gap to 2014.

December Bund futures rose 18 ticks to settle at 143.31, near a two-month high of 143.48 set on Tuesday. Chartists say a break above Tuesday's peak could see the contract target 144.49 and an extension towards August highs.

German 10-year yields were down 1.7 basis points at 1.33 percent.

The spread of 10-year Greek bond yields over Bunds was last around 1,610 basis points, its lowest in just over a week, but still around 100 basis points more than a month ago.

"It would be a big shock if they didn't get funding this year as there doesn't seem to be any appetite for trouble ahead of next year's German elections, so we're probably going to see a fudged solution for now," a trader said.

The EU's top economic official sought on Thursday to rule out any write-off of Greece's debt to governments. The IMF argues a write-down is necessary to put the country on a sustainable financial path.

WAITING GAME

Bunds have been rallying since mid-October when it became apparent that Spain was in no hurry to request financial assistance that would allow the European Central Bank to buy its bonds - as investors booked profits on higher-yielding peripheral bonds and moved back into safe-haven assets.

Spanish 10-year yields have risen around 60 basis points since mid-October and were a basis point lower on Friday to settle around 5.90 percent.

"The increase in the Spanish 10-year means that real money support is not massive," a trader said.

"Clearly this suggests that the only reason why Spain is supported is because people work under the assumption that ECB support is going to come very quicky...We're getting close to the point where the market is starting to get impatient."

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