EURO GOVT-Bunds fall on U.S. budget optimism, but trade choppy
* Bunds extend recent losses, still up on the month * Hopes for 'fiscal cliff' deal hurts Bunds * Market reaction to German Ifo business climate survey choppy By Ana Nicolaci da Costa LONDON, Dec 19 (Reuters) - German Bund futures fell on Wednesday, extending recent losses as growing expectations that U.S. lawmakers will manage to avert a fiscal crisis favored riskier assets at the expense of safe-haven debt. But a choppy reaction to a German business climate survey showed trade was erratic as investors adjusted positions before Christmas and the end of the year. "Books are generally positioned to be flat in the weeks before Christmas. This year, markets have gone into shutdown mode earlier than they have done in the past," Brian Barry, fixed income analyst at Investec said. German Bund futures, after seven straight sessions of losses, were a further 20 ticks lower at 144.21. The contract however was still up on the month and on the year. Hopes of a U.S. budget accord rose this week after President Barack Obama made a concession, offering to limit tax increases to incomes exceeding $400,000 per household - a higher threshold than the $250,000 he had sought earlier. In the case of a deal, Bunds would "knee-jerk down but I don't see why we are going to collapse on it. I don't think that's the only reason Bunds have been reasonably well bid recently," a trader said. "The growth outlook in Europe looks awful and those forecasts are presumably based on the fiscal cliff getting sorted out." Data on Wednesday showed Germany's Ifo business sentiment index climbed for the second month running in December. Bunds pared losses right after the release but then fell back again. U.S. FISCAL LIMBO The optimism surrounding U.S. budget talks remained even as Republicans in the House of Representatives announced Tuesday night that they expect to pass their own tax bill as a backup plan to avert the tax hikes and automatic budget cuts set to occur in January. Elwin de Groot, senior market strategist at Rabobank, said this was likely a tactic to try to get more concessions from the Democrats, who were unlikely to budge, and could further delay a deal markets are hoping will be struck before the new year. Even a compromise would likely result in some fiscal tightening which would curb U.S. economic growth, analysts said. "The market is really optimistic, maybe over-optimistic, on the fiscal cliff," Jean Francois Robin, head of strategy at Natixis said. Technical charts pointed to further weakness in the Bund, with Commerzbank pointing out it had broken key technical support at 144.50. But market players warned against reading too much into the price moves in thin year-end liquidity. "Everyone is shut for the year. People have got their books how they want, there is very little going on," he added. Ten-year Spanish yields were 1.7 basis points lower at 5.31 percent and Italian yields fell 5.1 bps to 4.41 percent.
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