EURO GOVT-U.S. debt limit proposal sends German yields higher

Mon Jan 21, 2013 7:31am EST

Related Topics

* 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' proposal to give the U.S. government leeway to pay its bills for another three months hurt appetite for safe-haven assets.

But 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. Thin volumes due to a U.S. holiday were exaggerating the rise in yields, traders said.

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 and stave off the risk of a debt default.

"It's surprising ... to see the Republicans have backtracked," ICAP strategist Philip Tyson said. "It does help at the margin but it's just kicking the can down the road."

Bund futures were last 31 ticks lower at 143.31, while 10-year yields were 2.6 basis points higher on the day at 1.586 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 key factors that drove yields higher last week - fears of sizeable early repayments of three-year 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, predicting instead a slow, gradual repayment of 1 trillion euros borrowed in December 2011 and February 2012.

ICAP's Tyson also said he expected German bonds to recover in the next few days as the market realises that its initial fears may have been "overdone" and liquidity in the euro banking system will remain abundant even after some loan repayments.

GERMAN ELECTIONS

Outside Germany, there was little evidence of any concerns about German Chancellor Angela Merkel's Christian Democrats narrowly losing an election in Lower Saxony.

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.

Ten-year Spanish yields were little changed at 5.10 percent on the day, and other liquid euro zone bond yields were also trading flat or somewhat higher.

"All support measures for the (euro) countries in the south have also been supported by the opposition," said Norbert Wuthe, rate strategist at Bayerische Landesbank, referring to the parties opposing Merkel.

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