EURO GOVT-German debt dips as U.S. optimism cools safety bid

Mon Nov 19, 2012 6:48am EST

Related Topics

* Positive tone to U.S. talks dampens safe-haven appeal

* German Bund yields still at historically high levels

* Release of Greek aid could push Bund yields up to 1.4 pct

By William James

LONDON, Nov 19 (Reuters) - German Bund futures slipped on Monday on optimism that U.S. leaders would make progress towards averting a round of growth-crimping spending cuts and tax rises, though debt problems in Greece and Spain limited the fall.

Leading U.S. lawmakers expressed confidence on Sunday that they could reach a deal to avert the $600 billion "fiscal cliff", even as they took positions on taxes and spending that may make any agreement more difficult.

Bund futures fell 26 ticks to 143.05 but remained firmly within the 142.83 to 143.48 range that held throughout last week. U.S. debt futures also dipped and equity markets rose.

"The positive chatter on the fiscal cliff is the main driver ... If these hopes build then maybe the sell-off will get a bit of traction but I still get the impression there are people out there looking to buy dips," a trader said.

Safe-haven assets have rallied since U.S. presidential elections confirmed a polarised political landscape, decreasing the likelihood of an easy solution to the looming fiscal crunch.

Despite the weaker start, German debt prices remain at historically high levels, supported by uncertainty over the payment of much-needed aid to Greece and concern over how long Spain will take to request a bailout.

Euro zone finance ministers will meet on Tuesday to discuss how to solve Greece's debt problems - the latest in a long line of meetings between international lenders, some of whom are keen to find a lasting debt solution before releasing more funds.

European Central Bank policymaker Joerg Asmussen said on Sunday a deal on the next two years of Greek funding should be agreed, confirming the view of many in markets that the meetings will result in an aid payment but no radical long-term plan.

Nevertheless, with 10-year German Bund yields at 1.35 percent and towards the lower end of the range in place since early August, there was room for yields to rise if policymakers reached an agreement, analysts said.

"Negative news on Spain and Greece has been priced in over recent weeks, so any news that's not as bad the market expects will be negative for Bunds and see some positive movement in spreads," said Alessandro Giansanti, strategist at ING.

Bund yields could rise back to 1.4 percent if the Eurogroup meeting produces an outcome interpreted as positive by the market, he said.

For Bund futures, a break below the bottom of the range at 142.83 could form a small 'double top' sell signal on intra-day charts, said Clive Lambert technical analyst at Futurestechs. But Lambert added that he still saw a break to the contract's record high of 144.49 as most likely.

The yield spread between Spanish and German 10-year bonds was 4 basis points tighter on the day at 454 bps, driven mostly by the rise in Bund yields.

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