* 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' proposal to give the U.S. government
leeway to pay its bills for another three months hurt appetite
for safe-haven assets.
But 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. Thin
volumes due to a U.S. holiday were exaggerating the rise in
yields, traders said.
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 and stave off
the risk of a debt default.
"It's surprising ... to see the Republicans have
backtracked," ICAP strategist Philip Tyson said. "It does help
at the margin but it's just kicking the can down the road."
Bund futures were last 31 ticks lower at 143.31,
while 10-year yields were 2.6 basis points
higher on the day at 1.586 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 key factors that drove yields higher last
week - fears of sizeable early repayments of three-year 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, predicting instead a
slow, gradual repayment of 1 trillion euros borrowed in December
2011 and February 2012.
ICAP's Tyson also said he expected German bonds to recover
in the next few days as the market realises that its initial
fears may have been "overdone" and liquidity in the euro banking
system will remain abundant even after some loan repayments.
Outside Germany, there was little evidence of any concerns
about German Chancellor Angela Merkel's Christian Democrats
narrowly losing an election in Lower Saxony.
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.
Ten-year Spanish yields were little changed at
5.10 percent on the day, and other liquid euro zone bond yields
were also trading flat or somewhat higher.
"All support measures for the (euro) countries in the south
have also been supported by the opposition," said Norbert Wuthe,
rate strategist at Bayerische Landesbank, referring to the
parties opposing Merkel.