* Last-minute U.S. budget deal cools demand for low risk
* Peripheral debt seen rallying; lack of supply helps
* Focus turning to U.S. debt ceiling talks in coming weeks
By Emelia Sithole-Matarise
LONDON, Jan 2 German Bunds fell on Wednesday
after U.S. lawmakers approved a deal preventing a round of
automatic tax hikes and spending cuts that had threatened to
prod the world's largest economy into recession.
The Republican-controlled House of Representatives approved
a bill that will raise taxes on top U.S. earners, fulfilling
President Barack Obama's re-election pledge and avoiding a
'fiscal cliff' of $600 billion in broad-based tax hikes and
The last-minute deal prompted a rally in riskier assets such
as equities to the detriment of debt, like Germany's, which has
been seen as a safe haven from mounting market tensions as the
U.S. negotiations dragged on last month.
The sell-off in German and U.S. government bonds was,
however, likely to be limited in coming weeks as focus turns to
fresh talks on raising the U.S. debt ceiling, traders and
"The compromise ... should weigh on Bunds which should
correct in line with Treasuries. Treasuries could even
underperform," said Rainer Guntermann, a strategist at
"But we also have the follow-up debate on the (U.S.) debt
ceiling which we are bumping into in February and this will be
another debate for the next few weeks which could possibly be
supportive for Bunds."
The Bund future was last 85 ticks down at 144.79
compared with 145.64 at Monday's close. European markets were
shut for New Year's Day on Tuesday.
Cash 10-year Bunds yielded 1.39 percent, up 9
basis points on the day and some traders and strategists see
them going as high as 1.45 percent in coming days.
"Bunds can sell-off back to 1.40/45 percent on the fiscal
cliff deal but we want to start adding to longs here," RBS
strategists said in a note.
Firming investor appetite for assets seen as higher risk
prompted a rally in peripheral euro zone bonds, with the Italian
10-year bond yield last 9 bps down at 4.42 percent
while the Spanish equivalent was 6 bps lower at
"The (U.S.) deal aids risk markets and should help to
stabilise semi-core and periphery markets this week but supply
is quickly likely to regain the focus and we expect some
tactical widening into issuance, but ultimately expect that this
issuance will be taken down well in January," the RBS
German kicks off 2013 debt issuance with a sale of zero
coupon two-year bonds later in the day where demand could fall
foul of the souring investor appetite for low-risk debt - now
carrying almost zero yields for investors.