Bunds stable as Obama holds fire on military action in Syria

LONDON, Sept 3 Tue Sep 3, 2013 3:04am EDT

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LONDON, Sept 3 (Reuters) - German Bunds were little changed on Tuesday as investors reacted cautiously to a decision by U.S. President Barack Obama to put off any military action in Syria until after consulting Congress.

Obama's efforts to persuade lawmakers to attack Syria were met with skepticism on Monday by some members of his Democratic Party who expressed concern the United States would be dragged into a new Middle East conflict.

Investors also kept an eye on the improving economic picture, with data on Monday showing European manufacturing activity beat forecasts, raising questions about the European Central Bank's promise to keep rates low for a long time.

The ECB meets on Thursday facing higher money market rates than when it took the unprecedented step of introducing forward guidance on interest rates in July.

But action to counter the tighter market conditions, which some fear could hinder the economic recovery, is unlikely given that the ECB failed to agree on a rate cut at the start of the summer when the economy looked in a worse state, analysts said.

"There doesn't seem to be much support for core paper ... with the geopolitical bids out of the market. We're not expecting (the ECB) to say anything positive for Bunds," one trader said.

Bund futures fell 1 tick to 140.09, while cash German yields were flat at 1.904 percent, keeping close to the 1-1/2 year highs of 1.98 percent hit last month before the conflict in Syria escalated.

Core yields have risen also on expectations the Federal Reserve could start trimming U.S. monetary stimulus later this month.

Some analysts say they are likely to rise further soon, especially given that debt sales from top-rated Austria, Germany and France this week are not supported by redemption flows.

"These yield levels of core paper may seem to those who are focusing on a euro zone crisis and the Great Recession to be generous," Credit Agricole rate strategist Peter Chatwell said in a note.

"But on the basis of a forward-looking market, e.g. PMI-led and adapting to developed economies which are growing, and this week's net cash drain, we would not be surprised if the 10-year Bund yield was to trend upwards to test 2 percent."

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