German yields hold near 3-week highs on U.S. deal expectations
By Marius Zaharia and Ana Nicolaci da Costa
LONDON Oct 14 (Reuters) - German government bond yields held near three-week highs on Monday, as markets remained confident the United States would resolve its fiscal stalemate despite a setback over the weekend.
Italian, Spanish, Portuguese and Irish bond yields fell as expectations that a deal to raise the U.S. borrowing limit could be reached in time to avoid a catastrophic default supported appetite for riskier assets. But trade was range-bound and thin with U.S. markets closed for Columbus Day.
Bipartisan talks to bring the U.S. fiscal crisis to an end broke down on Saturday in the House of Representatives and shifted to Senate leaders. Senate talks showed signs of progress on Sunday, but there were no guarantees of a compromise.
The U.S. government has been partially shut since Oct. 1 and is expected to reach its borrowing limit by Oct. 17.
Safe-haven German Bund futures closed 4 ticks down at 139.75, while 10-year cash yields were flat at 1.86 percent, just off Friday's three-week high of 1.89 percent.
"There's hardly a sense of panic. There's nonchalance. The widespread expectation is that there will be a deal to avoid (default)," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Volumes in Bund futures at about 200,000 lots were about a quarter of the year-to-date daily average, but BNP Paribas rate strategist Patrick Jacq said big moves in Bunds were unlikely even as U.S. investors return to their desks on Tuesday.
"The probability of an event is very low but if it materialises then consequences would be massive. This can prevent the market from taking any direction," he said.
Ten-year Italian government bond yields were 2.6 basis points lower at 4.26 percent and Spanish yields were 3 bps lower at 4.27 percent.
Italy's borrowing costs were sharply lower at a sale of up to 6 billion euros of bonds last Friday, rounding off a week of hefty debt sales in Rome and Madrid which drew robust interest.
The solid auctions highlighted improved sentiment towards the euro zone's debt-ridden southern economies, which is likely to support a Spanish sale of up to 2.5 billion euros ($3.4 billion) of three- and five-year bonds this Thursday.
PORTUGUESE BOND SWAP
Ten-year Portuguese yields briefly hit a fresh four-month low of 6.247 percent - some 5 bps lower on the day - as Lisbon said it was considering a debt exchange later this year in order to capitalise on the renewed demand for its bonds.
Portuguese bonds rallied last week following a positive review from its international lenders.
Debt swaps would put Portugal back on a path mirroring that taken by Ireland. Dublin is due to complete its bailout programme in December and said its hefty cash reserves mean that it may not need to seek any precautionary, follow-up credit line.
"If they do it and it's successful you would assume the market would be rallying on the back of it," said Alan McQuaid, chief economist at Merrion Stockbrokers.
Greek 10-year yields fell 26 bps to 8.69 percent as it announced plans to plug a funding gap by rolling over debt it issued in 2009 to support banks. Athens said it expected the European Central Bank to chip in, but European Central Bank policymaker Joerg Asmussen later reiterated the ECB view that this would infringe a ban on financing governments.
The move was exaggerated by illiquid conditions. Other Greek bonds were little changed.