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EURO GOVT-Signs of progress on U.S. budget deal weigh on Bunds
December 17, 2012 / 12:10 PM / 5 years ago

EURO GOVT-Signs of progress on U.S. budget deal weigh on Bunds

* Talks on U.S. budget deal go on, some progress seen
    * LDP wins Japan election, increasing cbank easing bets
    * Bund futures inch lower, periphery little changed

    By Marius Zaharia and Alistair Smout
    LONDON, Dec 17 (Reuters) - German Bunds dipped on Monday
following some progress in talks  to avert a fiscal crisis in
the United States next year, but losses were capped by the
limited time left for lawmakers to reach a final deal.
    The first palpable sign of progress in talks to avoid
automatic, large-scale fiscal tightening in 2013 came on Sunday,
when Republican House Speaker John Boehner offered to accept a
tax increase for the wealthiest Americans.
    His offer knocks down a key stumbling block in the
negotiations, but Boehner and President Barack Obama still have
plenty of unresolved differences such as the budget for
healthcare programmes. 
    About $600 billion worth of tax hikes and spending cuts are
due to come into force next year if a deal is not reached.
    Bund futures were 7 ticks lower on the day at
144.86, while German 10-year cash yields were 0.8
basis points higher on the day at 1.37 percent.
    "At least we do seem to have some broad (positive) backdrop
for negotiations going forward, but clearly time is running
out," said Nick Stamenkovic, bond strategist at RIA Capital
Markets in Edinburgh. 
    Analysts said Bunds looked more likely to fall than rise as
long as there was no panic about the U.S. "fiscal cliff". In the
debt-ridden euro zone, some things were falling into place.
    The bloc has agreed on a single supervisory system for its
banks and has approved a new tranche of aid funds to Greece. 
    A decision to resign by technocrat Italian Prime Minister
Mario Monti early initially scared investors who had trusted him
to bring down the country's debt. But that was followed by bets
he may become a strong candidate in next year's elections.
    Former Premier Silvio Berlusconi - a pariah for markets -
has said he will withdraw if Monti agrees to run as the head of
a centre-right alliance, helping Italian yields drop in recent
sessions. Ten-year yields were last 2 bps lower at
4.58 percent. 
    As those events unfolded, German 10-year yields gradually
rose from four-month lows of 1.258 percent hit on Dec. 10. 
    "The European and Greek issues are dealt with for this year.
They'll come back, but that's taking the edge out of the demand
for safe-haven assets," said Elisabeth Afseth, fixed income
analyst at Investec. 
    Some traders had expected a landslide election victory in
Japan by the Liberal Democratic Party to give a strong tailwind
to equities and weigh on safe-haven assets, such as German debt.
    Japan's next Prime Minister Shinzo Abe piled pressure on the
central bank on Monday, saying voters had backed his call for
aggressive monetary stimulus. The vote gave the LDP and its
small ally a two-thirds majority in the lower house, which is
expected to ease the passage of growth-boosting measures.
    But as volumes get thinner towards the end of the year, many
investors will stay clear of large bets and trades are likely to
become more "technical", traders said. 
    "It's mainly a technical move (in the Bund market). We are
now testing last Friday's lows at around 144.75 and we have
failed to break that (in a sustainable way)," one trader said.
"We're now playing the (range) between 145.00 and that level."
    UBS technical analyst Richard Adcock said 144.54 was a
strong support level for Bunds as it represented the 62 percent
Fibonacci retracement of the most recent rally. He said Bunds
were vulnerable to further falls as long as they traded below
Thursday's highs of 145.54.

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