* Republicans seek three-month debt limit increase
* Bund yields move to the top of their range
* Two-year yields unlikely to re-test recent highs-ING
By Marius Zaharia
LONDON, Jan 21 German Bund yields rose on Monday
after Republican lawmakers' efforts to give the U.S. government
leeway to pay its bills for another three months dented appetite
for safe-haven assets.
U.S. House Republican leaders said on Friday they would seek
to pass a three-month extension of the federal borrowing
authority in coming days to buy time for the Democrat-controlled
Senate to pass a plan to shrink budget deficits.
With no agreement yet on the proposal, analysts said room
for a further rise in yields was limited, especially since they
were trading close to the top of their recent range.
"This is part of the political game, it remains to be seen
whether the Democrats will accept it," KBC strategist Piet
Lammens said, adding that investors' working scenario was that a
solution to raise the ceiling would be eventually found anyway.
The U.S. Treasury needs congressional authorisation to raise
the current $16.4 trillion limit on U.S. debt sometime between
mid-February and early March. A failure to achieve that could
lead to a debt default.
Bund futures were last 15 ticks lower at 143.17,
while 10-year yields were 1.4 basis points
higher on the day at 1.574 percent, close to the top of this
year's roughly 30 basis points range.
ING rate strategist Alessandro Giansanti said he expected
selling pressure to ease at these levels and predicted yields
could fall back to the middle of their range at around 1.45
percent in coming days.
He said one of the major factors that drove yields higher
last week - fears of sizeable early repayments of loans that
euro zone banks took from the European Central Bank - was likely
to lose intensity in the next few days.
This would keep two-year yields around current
levels of 0.20 percent, after briefly rising to their highest in
nearly 10 months at 0.25 percent on Friday. Comments by ECB
board member Benoit Coeure that he did not expect the loan
repayments to have a major impact on short-term rates have
stabilised the market, Giansanti said.
"Yields have already moved to high levels. For them to rise
further we would have to see a sizeable repayment of above 100
billion euros (immediately)," he said. He added that he only
expected a slow, gradual repayment of the around 1 trillion
euros' worth of three-year loans taken out by banks in December
2011 and February 2012.
German Chancellor Angela Merkel's Christian Democrats lost
an election in Lower Saxony, with the centre-left Social
Democrats and the Greens garnering one more seat in the state
assembly than the centre-right.
Merkel remains favourite to win a third term in a general
election in September, but the centre-left majority in the
Bundesrat means the opposition can block major legislation and
initiate laws themselves.
Outside Germany, there was little evidence of any concerns,
with 10-year Spanish yields little changed at 5.09
percent on the day, and other euro zone yields also trading
"All support measures for the countries in the south have
also been supported by (Merkel's) opposition," said Norbert
Wuthe, rate strategist at Bayerische Landesbank.