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