* 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
* Record low yields at final Belgian auction of 2012
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 payments.
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.
Because of this, the outcome was subject to different
interpretations in financial markets but safe-haven Bund futures
made marginal gains, rising a modest 17 ticks to stand
at 142.29 while European equity markets fell.
Traders said the election result had also given some
opportunistic investors a reason to buy back in at cheaper
levels after a sustained sell-off last week.
Although there was limited reaction in Spanish debt, where
10-year yields edged 3 basis points higher to 5.67
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
Safe-haven German debt recovered some ground lost last week,
when Bunds fell almost a point, on the growing likelihood that
lenders would agree a way to pay out much-needed bailout funds
Belgium's borrowing costs meanwhile fell to new record lows
at its final debt auction of the year, as it raised more money
to fund 2013 requirements.
It paid 2.252 percent to sell 10-year bonds, yields on which
had neared 6 percent late last year, when Belgium was viewed as
a possible candidate for a bailout.
Euro zone finance ministers and the International Monetary
Fund meet on Monday 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.
But the strength of expectations left the market primed for
a safe-haven rally if leaders disappointed and delayed a
"Everyone's fairly relaxed they're going to do some sort of
a deal and so if they don't the price action could be quite
vicious," a trader said.
Longer-term, 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.