* Bunds up along with Treasuries as Republican proposal
* Safe-haven debt rally seen capped, some bet on last-minute
* Italy's budget, political future in focus
By Ana Nicolaci da Costa and Alistair Smout
LONDON, Dec 21 German Bunds rose on Friday as
investors favoured low-risk government debt after the latest
twist in U.S. budget talks raised the chances of a fiscal crunch
Republicans in the U.S. House of Representatives
surprisingly failed to muster enough support for a proposal that
would have averted the automatic tax hikes and spending cuts due
to come into effect in about two weeks.
German Bund futures gained 45 ticks to a settlement
close of 144.77, extending Thursday's rise, as Wall Street
dropped 1 percent.
"If they by any chance don't reach an agreement, probably we
will see a lot of volatility in the beginning of next year," a
"I think they will achieve an agreement, because it is
against the interests of both parties not to."
The bond rally could be capped as the end of the year
approaches and as some in the market hold on to a view that a
U.S. agreement will be achieved at the eleventh hour.
"I still think we're going to get some kind of deal done, so
ultimately Bunds are still on a downward trend, as they're tied
so closely to the fiscal cliff situation. But they're going to
get kicked about all over the place before year end," David
Keeble, global head of fixed income strategy at Credit Agricole
Failure to achieve a deal would likely give the Bund rally
further momentum, but the trader said there was strong
resistance at 145.00 - a 50 percent retracement from the
sell-off that started this month from the highest to the low.
Patrick Jacq, a strategist at BNP Paribas, said the market
reaction could increase pressure on politicians to achieve an
agreement, even if not a complete one, and 10-year Bund yields
would probably end the year around 1.35 percent.
Ten-year German yields were last down 3.9 bps
at 1.38 percent.
Traders were also watching events in Italy, where parliament
approved the 2013 budget.
Italian Prime Minister Mario Monti is preparing to hand in
his resignation to the president, opening the way to an election
expected in February.
The technocrat is expected to announce at the weekend that
he will participate in some way, either by endorsing parties
that want him to return as premier or saying he will run as a
Markets are keen for Monti to play a major role in the next
government to ensure the country follows through on budget
reforms needed to keep it out of the euro zone debt crisis.
Italian 10-year yields were last 5.7 basis
points up at 4.48 percent with Commerzbank strategists saying
the country's last debt auction of the year on Dec. 28 could
prompt some investors to book profits after the market's recent