* Bunds hit two-month highs, two-year yields turn negative
* Greece, U.S. elections underpin demand for safety
* Spanish bonds under selling pressure before Thursday's
By William James and Ana Nicolaci da Costa
LONDON, Nov 5 Two-year German bond yields fell
below zero on Monday as low-risk assets rallied before an
uncertain U.S. presidential election and another make-or-break
parliamentary vote in Greece.
Spanish bonds came under selling pressure before a debt sale
of up to 4.5 billion euros on Thursday, which will include the
longest dated issue to be sold at an auction since mid-2011.
Greece's government presents a new austerity package to
parliament on Monday, proposals which must win lawmakers'
approval if the country is to secure more aid and stave off
bankruptcy. Parliament is expected to vote on the package on
German bonds, seen as the lowest risk in the euro zone,
rallied as investors bought secure and liquid assets to protect
against the risk of a surprise vote against the Greek cuts.
Two-year yields fell to -0.01 percent, the
first time the debt has traded at a negative return since early
September. Bund futures rose 26 ticks to 142.13.
"Against this backdrop market participants are a little bit
worried about the next moves in the euro zone epic," said Marius
Daheim, chief strategist at Bayerische Landesbank.
"If political decisions in Athens cause the next tranche of
aid not to be paid out... then people would be looking at
contagion effects once again and reassessing their current view
that the crisis is contained."
A deal to keep Greece afloat is unlikely to be struck next
week when euro zone finance ministers meet in Brussels, a senior
EU official said on Monday.
Uncertainty over the Greek vote hit appetite for lower-rated
debt across the bloc and bonds issued by Spain, seen as the next
country to need a bailout, struggled. Ten-year Spanish yields
rose 10 basis points on the day to 5.77 percent.
Traders said Friday's ambitious announcement of plans to
launch a new five-year Spanish bond and tap 20-year paper later
in the week had caught some off guard and prompted selling.
Confirmation that the European Central Bank was reviewing
the terms on which it lent against Spanish securities also
"We've got a chunk of supply coming on Thursday, people are
setting up auction shorts (selling positions) ahead of it," one
"The five-year is going to have to come in at 5 percent to
get people interested ... We are pricing out OMT (Outright
Monetary Transactions) support for Spain as we meet more and
Spanish borrowing costs have been held down for months by
the prospect that the European Central Bank could buy bonds if
Spain asks for aid. In the secondary market, five-year Spanish
bonds last yielded 4.60 percent.
In the run-up to Tuesday's U.S. election, trading activity
was expected to be muted and biased towards a shift into safe
havens due to the risk of a change in the direction of fiscal
and monetary policy in the world's largest economy.
Markets lacked a clear consensus over whether a win for
Democratic incumbent Barack Obama would be positive or negative
for U.S. bonds, but euro zone debt prices were expected to track
any knee-jerk shift in Treasuries whether he or Republican
challenger Mitt Romney wins.
"The market is pretty dead at the moment and I would expect
it to stay that way until we get the U.S. elections out of the
way. On Wednesday morning, I'd expect Bunds to be doing whatever
Treasuries are doing - it's as simple as that," a trader said.
Until the election, the outlook for euro zone bonds was more
likely to be dominated by technical factors and the latest
flashpoint in Greece's battle to get a grip on its debt, traders