* Catalonia separatist vote nudges safe-haven Bunds higher
* Markets priced for Greek agreement to unlock aid funding
* Longer-term outlook hinges on debt sustainability measures
By William James
LONDON, Nov 26 German bonds rose on Monday as
concern at the outcome of Spanish regional elections outweighed
the market's growing optimism that lenders will finally come to
an agreement on Greek aid later in the day.
Separatist parties from Spain's Catalonia region won almost
two-thirds of seats in the local parliament, backed by voters
frustrated over the country's economic crisis and a tax system
seen as unfair to the wealthy region.
While the result underlined the political difficulties
facing Spain's government, it fell short of the convincing
separatist win needed to mount a push for a referendum on
independence for the region.
"The Catalonian election was pretty much expected ... but
any sign of Europe splitting up isn't great when they need to be
going the other way," a trader said.
Bund futures rose a modest 17 ticks to stand at
142.29, adding to initial gains when European equity markets
Although there was limited reaction in Spanish debt, where
10-year yields edged 1.5 basis points higher to
5.65 percent, the election impact could be felt more over the
longer term, analysts said.
"The separatist movement may ultimately impact on the market
due to fiscal concerns," Rabobank strategists said in a note.
"Namely the worry that the central government's appetite for
bringing the regions to heel in terms of budgetary alignment may
be limited due to the risk of stoking secessionist ambitions."
BUND OUTLOOK MIXED
The rise in safe-haven German debt recovered some ground
after a fall of almost a point last week based on the growing
likelihood that lenders would agree a way to pay out much-needed
bailout funds to Greece.
Euro zone finance ministers and the International Monetary
Fund will meet later to discuss how to make Greece's towering
debt levels more manageable, a necessary condition for the
release of the country's latest aid payments.
"Agreement on the next aid tranche will not trigger any
strong movement because it is well expected by the market - I
don't think this will bear on the Bund any more than it already
has," said BNP Paribas strategist Patrick Jacq.
Longer-term however, the clamour for the safety of German
Bunds, which has pushed yield to historically low levels, could
subside if attempts to set Greece's debt on a sustainable path
are deemed credible by the market.
Options under discussion include a lowering of the interest
rate on loans to Greece, deferring interest payments and buying
back privately-held Greek bonds.
"Anything that could improve the overall situation in Greece
could remove part of the risk-off (move) and therefore could
slightly weigh on safe-havens, for sure," Jacq said.