EURO GOVT-Bunds slip on signs of U.S. budget talks progress

Mon Dec 17, 2012 11:58am EST

* Some progress seen in talks on U.S. budget deal
    * Japan election result boosts central bank easing bets
    * Bund futures inch lower, periphery little changed

    By Marius Zaharia and Emelia Sithole-Matarise
    LONDON, Dec 17 (Reuters) - German Bund prices slipped on
Monday after U.S. politicians took a small step towards averting
a fiscal crisis next year, but losses were capped by the limited
time left for lawmakers to reach a final deal.
    The first real movement in talks to avoid automatic,
large-scale fiscal tightening in 2013 came on Sunday, when
Republican House Speaker John Boehner offered to accept a tax
increase for the wealthiest Americans.
    His offer knocks down a key stumbling block in the
negotiations, but Boehner and President Barack Obama still have
plenty of unresolved differences such as the budget for
healthcare programmes. 
    About $600 billion worth of tax hikes and spending cuts are
due to come into force next year if a deal is not reached.
    Bund futures were 7 ticks lower on the day to
settle at 144.86, while German 10-year cash yields 
were one basis point higher on the day at 1.37 percent.
    Analysts said Bund prices looked more likely to fall than
rise as long as there was no panic about the U.S. "fiscal
    "We should get something either good or bad on the fiscal
cliff in coming days. They have to go off for Christmas so it
puts a bit more pressure on them to get it done," said David
Keeble, global head of fixed income strategy at Credit Agricole.
    "If they come up with a solution that will take Bund yields
higher towards the end of the year."
    In the debt-ridden euro zone, some things were falling into
place which cooled demand for safe-haven German debt. The bloc
has agreed on a single supervisory system for its banks and 
approved a new tranche of aid funds to Greece. 
    A decision by technocrat Italian Prime Minister Mario Monti
to resign early had scared investors who trusted him to bring
down the country's debt. But there are now bets he may become a
strong candidate in next year's elections.
    "Holding the elections in February would reduce the
uncertainty. The financial markets would favour a scenario that
keeps the much-respected outgoing Prime Minister well within the
ranks of economic policy makers," said Cosimo Marasciulo, head
of European government bonds and FX at Pioneer Investments.
    Pioneer Investments, which has 155 billion euros of assets
under management as of Nov. 30, booked some profits on some of
its holdings in Italian and Spanish debt in October after the
sharp rally in the bonds since July. 
    Marasciulo said the move was tactical and not driven by the
political situation in Italy. He would look for opportunities to
re-enter the market on a backup in yields and spreads.
    Former Premier Silvio Berlusconi - a pariah for markets -
has said he will withdraw if Monti agrees to run as the head of
a centre-right alliance, helping Italian yields drop in recent
sessions. Ten-year yields were last 2 bps lower at
4.58 percent. 
    As those events unfolded, German 10-year yields gradually
rose from four-month lows of 1.258 percent hit on Dec. 10. 

    Market participants also had an eye on events in Japan as
some traders had expected a landslide election victory by the
Liberal Democratic Party to lift equities and weigh on
safe-haven assets, such as German debt. 
    Japan's next Prime Minister Shinzo Abe piled pressure on the
central bank on Monday, saying voters had backed his call for
aggressive monetary stimulus. The vote gave the LDP and its
small ally a two-thirds majority in the lower house, which is
expected to ease the passage of growth-boosting measures.
    But as volumes get thinner towards the end of the year, many
investors will stay clear of large bets and trades are likely to
become more "technical", traders said. 
    "It's mainly a technical move (in the Bund market). We are
now testing last Friday's lows at around 144.75 and we have
failed to break that (in a sustainable way)," one trader said.
"We're now playing the (range) between 145.00 and that level."
    UBS technical analyst Richard Adcock said 144.54 was a
strong support level for Bunds as it represented the 62 percent
Fibonacci retracement of the most recent rally. He said Bunds
were vulnerable to further falls as long as they traded below
Thursday's highs of 145.54.