EURO GOVT-Bunds firm as U.S. fiscal talks face fresh obstacles

Thu Dec 20, 2012 4:38am EST

Related Topics

* U.S. budget impasse gives investors chance to buy back
    * If deal agreed, 10-year Bund yields could rise to 1.55 pct
-analyst
    * Trade thinning in run-up to Christmas, year-end


    By Ana Nicolaci da Costa
    LONDON, Dec 20 (Reuters) - Bunds firmed on Thursday as
hiccups in U.S. budget talks provided investors with an
opportunity to take profit in riskier assets and buy back into
cheapened safe-haven bonds.
    Financial markets have for weeks been sensitive to any
developments in talks aimed at averting U.S. tax rises and
spending cuts that would automatically be triggered early next
year and, many fear, tip the world's top economy into a
recession.
    A deal had looked within reach as the two sides made
concessions, but the climate soured after Republicans announced
plans on Tuesday to put an alternative tax scheme to a vote this
week. On Wednesday, President Barack Obama threatened to veto
the Republican measure if Congress approved it. 
    After eight consecutive sessions of losses, German Bund
futures were up 12 ticks on the day at 144.27 in
volumes thinning out before Christmas and the end of the year.
    "We are seeing a fairly consistent risk-off mode this
morning and it seems this is all on the back of fiscal cliff
talks having gone sour again," Rainer Guntermann, strategist at
Commerzbank, said.
    He said the market may have been poised for a correction
after the recent rise in Bund yields. Ten-year German borrowing
costs were little changed at 1.42 percent.
    Bonds issued by lower-rated sovereigns were broadly lower as
investors took some profit on the previous day's rally. 
    Ten-year Spanish yields were up 1.9 basis
points at 5.29 percent and the Italian equivalent 
rose 3 bps to 4.42 percent.
    Political tensions in Italy and uncertainty over who will
lead the country next drove Italian borrowing costs over ten
years near to 5 percent last week. I t aly's president gave a
strong indication on Wednesday that an election would be held in
late February. 
  Greece's bonds also came under slight pressure after a sharp
rally in the previous session fuelled by the European Central
Bank's decision to once again accept Greek debt as collateral at
its funding operations.
    Ten-year Greek bond yields were 8.6 basis
points higher at 11.70 percent. Finance Minister Yannis
Stournaras said in the Financial Times the country was facing a
critical year ahead. 
    
    DIRE CONSEQUENCES
    Though the outcome of the U.S. budget talks remains
uncertain, analysts say the consequences of the "fiscal cliff"
are potentially too dire for the White House and the Republicans
not to achieve a compromise.
    "The risk is too high (that) we can have a strong sell-off
in risky assets and that the U.S. economy will fall into
recession, so they will try to find an agreement for the end of
the year. They will push hard," Alessandro Giansanti, senior
rates strategist at ING said.
    A deal would boost equity markets and safe-haven debt would
sell off, driving German 10-year yields as high as 1.55 percent,
he said. 
    "The risks to the euro zone economy are still present in the
market so they will not disappear because of (a) fiscal cliff
agreement," Giansanti added, explaining why any bond sell-off
would be limited.
    Failure to reach an agreement before the end of the year
would push 10-year German yields towards 1.30 percent, he said.
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