EURO GOVT-Bund sell-off stalls as U.S. faces new budget battles
* Bunds stabilise after big sell-off on U.S. fiscal deal
* Fresh U.S. bigger budget debates loom in coming weeks
* Major rise in Bund yields unlikely near term
By Marius Zaharia
LONDON, Jan 3 (Reuters) - German Bunds steadied on Thursday, with the impact of a deal to avert large-scale fiscal tightening in the United States fading as politicians there braced for bigger budget battles in coming weeks.
President Barack Obama signed a deal on Wednesday to stave off some $600 billion in automatic tax rises and spending cuts. But Republican lawmakers, angry the deal did little to curb the federal deficit, said they would use a debate over raising the government borrowing limit to win deep spending cuts.
Failure to raise the borrowing limit could lead to a U.S. debt default.
The deal to avoid the so-called fiscal cliff, which could have sent the U.S. back into recession triggered a sell-off in safe-haven assets, including Bunds, on Wednesday, but many market participants believe the move went too far.
"There was some joy about the temporary solution that had been found ... but it was an exaggerated move," said Norbert Wuthe, rate strategist at Bayerische Landesbank.
"The discussion about the debt ceiling could be even worse."
Ten-year German cash yields were flat at 1.44 percent. For the past two months, they have failed to break above the 1.45-1.46 percent area, despite several attempts.
"The 1.45 percent level in (Bund) yields is one where it feels OK to be buying," one trader said, adding that the latest fiscal deal would not solve U.S. budget problems.
Bund futures were last three ticks lower at 144.04, after falling by 157 ticks on Wednesday.
Analysts said an improvement in the global economic outlook or fresh evidence the euro zone debt crisis can be contained was needed for Bund yields to move higher.
On the euro zone front, Spain is expected in 2013 to request financial assistance, a move which could activate the European Central Bank's bond-buying programme (OMT) and test its potency as an anti-crisis tool.
"One pre-requisite for Bund yields to start moving up is that we have a further transfer of risk in the euro area. That de facto takes place when a country like Spain seeks help and enables the OMT," Rabobank rate strategist Elwin de Groot said.
Commerzbank strategists recommended investors buy Bunds on Thursday, replacing the "sell" call of the previous session. Rate strategists at Lloyds said Wednesday's sell-off offers an opportunity to buy Bunds.
Technical strategists also said further losses in Bund futures seemed unlikely in the near-term.
"The support line is at 143.90 in the weekly chart of the March contract. Moreover, the notable low from Dec. 19 is located at 143.80. Unless this area is undershot, it is too soon to bet on further major losses," Helaba Landesbank Hessen-Thueringen strategists said in a note.
In the lower-rated euro zone countries, high-yielding Spanish and Italian bonds weakened slightly after a rally on Wednesday. Spanish 10-year yields rose 1 bps to 5.06 percent, while equivalent Italian yields were 2 bps higher at 4.30 percent.