EURO GOVT-Bund yields edge up after U.S. debt limit proposal
* Republicans seek three-month debt limit increase
* Bund yields move to the top of their range
* Two-year yields unlikely to re-test recent highs-ING
By Marius Zaharia
LONDON, Jan 21 (Reuters) - German Bund yields rose on Monday after Republican lawmakers' efforts to give the U.S. government leeway to pay its bills for another three months dented appetite for safe-haven assets.
U.S. House Republican leaders said on Friday they would seek to pass a three-month extension of the federal borrowing authority in coming days to buy time for the Democrat-controlled Senate to pass a plan to shrink budget deficits.
With no agreement yet on the proposal, analysts said room for a further rise in yields was limited, especially since they were trading close to the top of their recent range.
"This is part of the political game, it remains to be seen whether the Democrats will accept it," KBC strategist Piet Lammens said, adding that investors' working scenario was that a solution to raise the ceiling would be eventually found anyway.
The U.S. Treasury needs congressional authorisation to raise the current $16.4 trillion limit on U.S. debt sometime between mid-February and early March. A failure to achieve that could lead to a debt default.
Bund futures were last 15 ticks lower at 143.17, while 10-year yields were 1.4 basis points higher on the day at 1.574 percent, close to the top of this year's roughly 30 basis points range.
ING rate strategist Alessandro Giansanti said he expected selling pressure to ease at these levels and predicted yields could fall back to the middle of their range at around 1.45 percent in coming days.
He said one of the major factors that drove yields higher last week - fears of sizeable early repayments of loans that euro zone banks took from the European Central Bank - was likely to lose intensity in the next few days.
This would keep two-year yields around current levels of 0.20 percent, after briefly rising to their highest in nearly 10 months at 0.25 percent on Friday. Comments by ECB board member Benoit Coeure that he did not expect the loan repayments to have a major impact on short-term rates have stabilised the market, Giansanti said.
"Yields have already moved to high levels. For them to rise further we would have to see a sizeable repayment of above 100 billion euros (immediately)," he said. He added that he only expected a slow, gradual repayment of the around 1 trillion euros' worth of three-year loans taken out by banks in December 2011 and February 2012.
German Chancellor Angela Merkel's Christian Democrats lost an election in Lower Saxony, with the centre-left Social Democrats and the Greens garnering one more seat in the state assembly than the centre-right.
Merkel remains favourite to win a third term in a general election in September, but the centre-left majority in the Bundesrat means the opposition can block major legislation and initiate laws themselves.
Outside Germany, there was little evidence of any concerns, with 10-year Spanish yields little changed at 5.09 percent on the day, and other euro zone yields also trading virtually flat.
"All support measures for the countries in the south have also been supported by (Merkel's) opposition," said Norbert Wuthe, rate strategist at Bayerische Landesbank.
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