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

Thu Dec 20, 2012 7:32am 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
    * Greek bonds under slight pressure after rally, finmin's
comments


    By Ana Nicolaci da Costa and Alistair Smout
    LONDON, Dec 20 (Reuters) - German Bund futures firmed on
Thursday as a stalling in U.S. budget discussions fueled demand
for cheapened safe-haven bonds at the expense of riskier assets.
    Financial markets have for weeks been sensitive to any
developments in talks aimed at averting the automatic triggering
early next year of U.S. tax rises and spending cuts, which many
fear would 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 15 ticks on the day at 144.30, with
volumes thinning out before Christmas and the end of the year.
    "The Bunds are trading off the U.S. news, which was negative
overnight with regards to the fiscal cliff," Lyn Graham-Taylor,
fixed income strategist at Rabobank, said.
    Greece's bonds came under slight pressure after a sharp
rally in the previous session and as Finance Minister Yannis
Stournaras said in the Financial Times the country was facing a
critical year ahead. 
    The Greek February 2023 bond yield was 8.7
basis points higher at 11.71 percent. It fell well over a point
in the previous session as the European Central Bank decided to
once again accept Greek debt as collateral at its funding
operations. 
    "Periphery-wise, there's a little bit of a systemic risk
increase over Greece, with the finance minister saying we're not
out of the woods yet," Graham-Taylor said.
    Ten-year Spanish yields were up 1 basis point
at 5.28 percent and the Italian equivalent rose 2
bps to 4.41 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 after Prime Minister Mario
Monti said he would resign early.
    Italy's president gave a strong indication on Wednesday that
an election would be held in late February.  
    
    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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