Bund futures sag on signs of progress in U.S. budget talks
* U.S. Republicans said considering short-term hike in debt limit
* Bunds follow U.S. Treasuries down as equities rally
* Lower-rated euro zone debt supported by firmer tone for risk
By Emelia Sithole-Matarise
LONDON, Oct 10 (Reuters) - German Bund futures fell on Thursday, tracking Treasuries lower as signs of some progress in the United States over breaking a budget impasse lifted equities at the expense of low-risk assets.
U.S. Republicans were considering a short-term hike in the government's borrowing authority to buy time for talks on broader policy measures, a Republican leadership aide said on Wednesday. President Barack Obama has said he would accept a short-term ceiling increase as long as no strings were attached.
Bund futures fell 33 ticks to 139.91 while German 10-year yields were 3 bps higher at 1.85 percent. The U.S. 10-year T-note yield was up 4 bps at 2.70 percent.
"Clearly every piece of news that could lead markets to think that a solution is likely to be found regarding the debt ceiling and the budget is likely to weigh on Treasuries and core euro zone government bonds," BNP Paribas strategist Patrick Jacq said.
"What kept these markets relatively strong so far was the fact that appetite for risk was hit by these issues."
Jacq said German 10-year yields could go as high as 1.90 percent in coming sessions if there were definite signs that U.S. politicians could reach a deal to raise the government's borrowing limit before an Oct. 17 deadline when it is due to hit the statutory debt ceiling.
Some in the market such as Commerzbank strategists remained cautious, seeing little scope for a significant selloff in safe-haven government debt until a solution is found.
"The overwhelming consensus for a benign solution (is) holding back escalation longs (buying) in Bunds," they said in a note. "Thus, Bunds may stay on the back foot initially after the erosion of the technical support line at 140.10, but rising anxiety about an accident may increasingly provide an underlying bid until a solution is reached."
The firmer tone in riskier assets kept lower-rated euro zone debt steady. Spanish and Italian 10-year yields were flat at 4.33 and 4.37 percent respectively after Madrid and Rome's successful debt sales on Wednesday.
Italy is scheduled to auction up to 6 billion euros more of debt on Friday after it sold 5 billion euros of a new 7-year bond via a syndicate of banks.
Italian and Spanish yields are expected to resume their downward trek once all the supply is out of the way this week and if the United States ends its debt stalemate
Markets reacted placidly to the release of minutes on Wednesday from the Fed's last policy meeting which showed policymakers split on the decision to refrain from tapering in September, because the market was looking ahead to future events.