EURO GOVT-Bunds slip as euro zone allays Greece fears
* Greek aid tranche delayed again, Eurogroup meets Monday
* Germany sells 3.25 billion euros of bonds
* Demand for safe-haven assets remains strong
By Kirsten Donovan and Marius Zaharia
LONDON, Nov 21 (Reuters) - German Bunds slipped on Wednesday as euro zone leaders soothed concerns about the failure so far of Greece's international lenders to reach a deal needed to release more aid to Athens.
Euro zone finance ministers, the International Monetary Fund and the European Central Bank will meet again next Monday to try to work out how to get Greece's debt down to a sustainable level.
The lack of consensus leaves the market no choice but to price in the possibility that Greece may receive no further help and slide into an uncontrolled default that could pitch it out of the currency union.
But markets took some comfort from German Chancellor Angela Merkel saying she saw a chance for a deal on Monday and that lower interest rates and an expanded European Financial Stability Fund could fill Greece's funding gap.
France said a deal was "a whisker away" and Eurogroup Chairman Jean-Claude Juncker attributed the delay to "technical reasons".
"The market has concluded it's just a matter of time before Greece gets its funding," said Nick Stamenkovic, rate strategist at RIA Capital Markets.
"There's a commitment amongst all EU members, the ECB and the IMF to keep Greece intact within the single currency so they'll find some way to meet any funding gaps."
Bund futures settled 21 ticks lower at 142.17, having traded as high as 142.64 before Merkel's comments. On Tuesday, bets that a deal would be reached pushed them 62 ticks lower.
Cash 10-year Bund yields were 2 basis points higher at 1.437 percent, in the middle of a roughly 50 basis points trading range that has held for the past six months.
"There is general quietness ahead of Thanksgiving," a trader said, adding that he expected that to last the rest of the week with U.S. markets closed on Thursday.
UBS rate strategist Gianluca Ziglio said Bunds may lose further ground once the Greek aid tranche is released, as markets remove the "tail risk" from the price.
Greek debt markets, which are dominated by hedge funds that are willing to take higher risks than other investors, rallied. The 10-year Greek bond yield was 36 basis points down on the day at 16.81 percent, falling for the ninth consecutive session.
Still, the lack of resolution on Greece as well as broader euro zone debt problems ensured that an auction of 10-year German government bonds drew solid demand despite low returns.
Spanish 10-year yields fell 13 basis points on the day to 5.73 percent, with traders citing buying from domestic investors before Thursday's auction of three-, five- and nine-year bonds.
"I wouldn't be surprised - we've seen that happening - if there was some sort of moral suasion on Spanish banks to buy the paper ahead of auctions to make dealers short and buy the paper at the auction to cover themselves," Ziglio said.
"It basically creates additional demand that otherwise wouldn't be there."
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