* Bunds reverse early gains after GDP data
* Still supported by fiscal cliff worries, Greek woes
* Strong demand at French bond auction
By Kirsten Donovan
LONDON, Nov 15 (Reuters) - German government bond prices reversed early gains on Thursday on some relief that euro zone growth data was not as bad as expected, even though it showed the region had slipped into recession.
Bunds did not stray far though with growth concerns also in focus in the United States where there is still uncertainty as to how the political divide might be bridged to avoid tipping the economy over the edge of the $600 billion “fiscal cliff” of automatic tax increases and spending cuts due to take effect in the new year if no deal is done.
Meanwhile, the euro zone slipped into its second recession since 2009 in the third quarter as economic output fell 0.1 percent.
Bund futures were seven ticks lower on the day at 143.07, off their session peak of 143.37 but still close to two-month highs hit on Tuesday.
“The prices were marked up a bit this morning in reaction to (lower) equity markets rather than any new money coming in,” a trader said.
“The data was more or less in line with consensus and as such there’s probably a little bit of relief that it isn’t worse.”
Trading is likely to remain choppy until the U.S. fiscal impasse is resolved as politicians try to hammer out a compromise but ING rate strategist Padhraic Garvey said market prices did not reflect the prospect of no solution being found.
“The basic market discount is that something is going to get done in the U.S.. The market doesn’t seem to be of the opinion we stay in limbo and fall off this cliff,” he said.
“Both Treasuries and Bunds have had a decent couple of weeks ... but it is generally still a risk-off tone out there which is supporting core products.”
President Barack Obama said on Wednesday that Republicans would have to agree to higher taxes for the wealthy as a first step in talks.
Lower-risk assets were also broadly supported by a disagreement between the European Union and International Monetary Fund over how to make Greece’s debt sustainable, meaning Bunds could make further gains from their current elevated levels, traders and analysts said.
“(Bunds) don’t really seem to want to sell off and there’s no reason for them to do so but positioning is pretty flat,” a second trader said.
Technical analysts said Bund futures needed to break above Tuesday’s high of 143.48 to gain further impetus and that would allow a push higher to 143.75 and then on to above 144.00.
Although there are signs that Greece will secure the aid needed for the rest of the year, finding a longer-term solution has sparked disagreements and helped lift Bunds.
European Governing Council member Luc Coene was quoted as saying that at least part of Greece’s debt would probably have to be written down.
He added that Spain urgently needed to seek a bailout, but with the country having completed its 2012 bond issuance and its yields well off 2012 highs, there are few signs of it preparing to do so.
The recent demand for low-risk assets saw investors scoop up French bonds an auction. The country sold 7.5 billion euros of bonds with two-year yields hitting a record low at the sale .
“The (bonds) received very strong demand, probably because this was the last (shorter-dated) auction for 2012 and dealers see some opportunities of richening from the current levels,” said Annalisa Piazza, a market economist at Newedge strategy in a note.
Richening refers to the bonds increasing in value.
France also sold 1.3 billion euros of inflation-linked paper .