* Worry over temporary nature of deal, Fed tapering delay
* Strong Spanish sale shows demand for country's debt still
* France also sees firm demand at auction
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON, Oct 17 High-rated euro zone debt rose on
Thursday as market players viewed an 11th-hour deal to avoid a
U.S. debt default as a "stop-gap" measure likely to delay moves
by the Federal Reserve to scale back bond purchases.
The overnight deal fully funds the U.S. government only
until Jan. 15 and raises the debt ceiling until Feb. 7.
Investors worry that fundamental differences between Republicans
and Democrats over spending and deficits herald another bitter
budget fight and government shutdown early next year.
Those concerns were reflected in costs of insuring against a
U.S. default. One-year credit default swaps were down more than
20 basis points from last week's highs, but they remain higher
than five-year rates, suggesting "tail-risk" has yet to be fully
It is normally costlier to buy longer-term credit
German Bund futures jumped 77 ticks to settle at
139.68, pushing 10-year German yields 7 basis
points down to 1.87 percent, off their highest in almost a
"The fact that this is a stop-gap solution has had a big
impact on what people think the Fed is going to do," said Lyn
Graham-Taylor, a strategist at Rabobank. "Therefore tapering
expectations have been pushed back to March 2014 (from December
2013), so the bid for government bonds makes sense."
Word that new U.S. jobless claims last week declined by less
than economists had estimated was supportive for core euro zone
bonds as they tracked U.S. Treasuries higher, since the weaker
the U.S. employment picture, the less likely the Fed would be to
become less accommodating.
Among higher-yielding bonds, continuing healthy demand for
Spanish paper extended to a strong auction at which the Madrid
treasury sold 2.54 billion euros of debt - above the targeted
amount as medium-term debt costs fell.
Analysts said the U.S. backdrop was supportive but also
noted that recent demand for euro zone peripheral debt has
generally been driven by improved economic forecasts and hopes
for further liquidity from the European Central Bank.
FRENCH BONDS POPULAR
Other higher-rated euro zone debt also rose, as France saw
strong demand for its bonds at two auctions.
The euro zone's second-largest economy has been steadily
attracting good demand for its bonds despite sluggish growth and
delays in reaching its deficit and debt targets, as it offers
better returns than Germany.
French 10-year government bond yields were down 5 basis
points at 2.39 percent. Equivalent Dutch and Austrian yields
were lower by 2.24 percent and 2.27
In Madrid, there was strong demand for the three-year and
five-year bonds on offer, with the shorter yield falling to its
lowest point since April 2010 and the longer one to its lowest
rate since it was first sold in July.
In the secondary market, Spanish yields were flat at 4.30
percent while the Italian equivalents were 4 bps
lower at 4.20 percent /
"Overall, it's a fairly solid auction but also we have to
keep in mind that it's not a huge surprise, because the auction
size was small in the first place and we had a budget deal in
the U.S. so some positive momentum here for sentiment," Michael
Leister, senior interest rate strategist Commerzbank, said.