November 15, 2012 / 9:21 AM / 5 years ago

EURO GOVT-Bunds inch up on fiscal cliff, Greece worries

* Bunds supported by fiscal cliff worries, Greek woes

* Potential for further rises seen

* France to sell up to 9 bln euros of debt

By Kirsten Donovan

LONDON, Nov 15 (Reuters) - German government bonds held steady on Thursday, supported by concerns over protracted gridlock in talks to resolve the U.S. “fiscal cliff” which threatens to tip the economy back into recession.

That, along with disagreements between the European Union and International Monetary Fund over how to make Greece’s debt sustainable, meant Bunds could make further gains from their current elevated levels, traders and analysts said.

Data showing the euro zone is likely to have slid into recession in the third quarter, despite Germany and France eking out growth, also helped safe-haven debt.

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 to avoid $600 billion of tax increases and spending from kicking in at the beginning of next year .

The recent demand for lower-risk assets means bidding is expected to be strong at a French bond auction later on Thursday, along with the small additional yield the paper offers versus equivalent German issues.

German Bund futures were 8 ticks higher at 143.22, close to two-month highs hit on Tuesday, while 10-year cash yields were a basis point lower at 1.334 percent.

“Greece and Spain rumble on in the background but the fiscal cliff is the more interesting in terms of market impact and that’s going to run until the end of the year,” a trader 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.”

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.

France will sell up to 7.5 billion euros of conventional bonds, as well as up to 1.5 billion euros of inflation linked paper.

“The (sale) is likely to be very well received, given the ongoing demand for French paper from real money investors,” said Credit Agricole rate strategist Peter Chatwell in a note.

“We expect yesterday’s cheapening has set the market up to absorb the paper well.”

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