EURO GOVT-Bunds range-bound; investors expect little from ECB

Thu Dec 6, 2012 4:08am EST

Related Topics

* ECB expected to stay on hold; markets broadly steady

* Little progress on U.S. budget talks limits Bund's downside

* France sells 3 to 4 billion euros of debt

By Ana Nicolaci da Costa

LONDON, Dec 6 (Reuters) - German Bund futures traded in tight ranges early on Thursday with investors expecting little from the European Central Bank policy meeting and as an impasse in U.S. budget talks left them without clear direction.

The ECB is likely to keep interest rates on hold later in the day but may offer clues on its policy path for next year with updated forecasts likely to present a grim outlook for the euro zone economy..

"The ECB will keep the door open for maybe another refi rate cut early next year," Patrick Jacq, European rate strategist at BNP Paribas said.

"I think there will be no change from the latest press conference in early November. That's probably why the market is relatively stable today ahead of the meeting."

On Nov 8, ECB President Mario Draghi said the euro zone economy showed little sign of recovering before the year-end, leaving open the possibility of an interest rate cut in the months ahead.

German Bund futures were down 12 ticks on the day at 143.68. The December contract rolls over this session and the March contract was down 12 ticks on the day at 144.98.

"I don't think many people are expecting a cut, but people generally are expecting a slight dovish tone overall," one trader said.

"CORE" DEMAND

Long-term worries about the euro zone and more immediate concerns about talks in the United States aimed to avert a fiscal crisis have recently benefited safer government bonds and French 10-year yields hit euro-era lows in the previous session.

The backdrop should bode well for a sale of 3 to 4 billion euros of French debt maturing in 2018, 2019 and 2027.

French bonds have been in demand as attractive alternatives to German bonds, because they offer relative safety and liquidity, while also providing a pick-up over Germany's ultra-low yields.

"Even at 2 percent, (the French yield) might be (at) euro-era lows, but it's still cheaper than German," a second trader said, predicting the premium 10-year French debt offer over Germany will fall further into year-end from 65 basis points currently.

Financial markets have been sensitive to any comments on the progress of U.S. talks to avoid spending cuts and tax rises being triggered in January. U.S. Treasuries firmed in Asian trading with little signs of progress in Congressional talks on Wednesday.

"Our base scenario is that they will come up with some kind of a solution to this. But it may take longer than the market likes," Elwin de Groot, senior market economist at Rabobank said. "We need to get over this uncertainty regarding the fiscal cliff before we can see a more lasting turnaround in the Bund." (Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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