EURO GOVT-U.S. optimism cools safety bid for German Bunds

Mon Nov 19, 2012 11:59am EST

Related Topics

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

* German Bund yields still at historically low levels

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

By Kirsten Donovan and William James

LONDON, Nov 19 (Reuters) - Bunds slipped on Monday on optimism that U.S. leaders would make progress on averting a round of growth-crippling spending cuts and tax hikes, 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 settled 31 ticks lower at 143.00, but despite testing the lower end of the 142.83 to 143.48 range that held throughout last week, they remained firmly within it.

"The prospect of some kind of solution to the fiscal cliff is weighing on Treasuries and in turn on Bunds, and that's accelerated since the U.S. market opened," a trader said, adding that trading was very quiet with markets feeling "more like Dec. 19 than Nov. 19".

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

That, despite intra-day volatility, has pushed German bond yields back towards all-time lows with additional support coming from 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.

Officials said there should be a tentative go-ahead for the payment of 44 billion euros of emergency funding to Greece .

Ten-year Bund yields were 3 basis points higher at 1.36 percent, but still towards the lower end of their range since early August, leaving room for yields to rise if policymakers reached an agreement, analysts said.

"We are still in an overall range for yields, and indeed at the lower end of that," said Nordea rate strategist Niels From.

"If Greece gets the money, or there are further indications they will get it, then we could see Bund yields rise back to a level around 1.45 percent."

ING rate strategist Alessandro Giansanti shared that view, saying yields could rise back to 1.4 percent if the Eurogroup meeting produces an outcome seen as positive by the market.

"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.

The yield spread between Spanish and German 10-year bonds was 3 basis points tighter on the day at 455 bps, driven mostly by the rise in Bund yields.

Spain said it will auction 3.5 billion euros of bonds on Thursday. It has already reached its 2012 funding target and is cashing in on investors' belief that the European Central Bank will eventually have to buy Spanish bonds.

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