* EU steps to overcome crisis weigh on Bunds
* U.S. "fiscal cliff" limits downside
* German yields seen capped by economic outlook, rate policy
By Ana Nicolaci da Costa
LONDON, Dec 14 German Bunds held broadly steady
on Friday, as investors welcomed European steps to overcome the
debt crisis but stayed cautious over an impasse in U.S. budget
talks, leaving the market devoid of clear direction.
After four days of losses and a lower open, traders said
bargain-hunters were buying back into the market and they
expected further price swings as liquidity thinned and investors
adjusted positions into the end of the year.
"We are heading into Christmas, year-end balance sheet
adjustment and, if anything, people want to show that they are
exposed to Bunds rather than peripheries," Rainer Guntermann,
strategist at Commerzbank.
German Bund futures were nine tick higher on the
day at 145.14.
The rebound from the day's lows coincided with a survey
showing the euro zone recession deepened in the current quarter
after the bloc's private sector contracted for the 11th
successive month in December..
But analysts said the data had not fundamentally changed the
economic outlook, and that opposing forces were at work.
"I am a bit cautious on the Bund because I think there are
important decisions taken in Europe," Piet Lammens, strategist
at KBC said. "On the fiscal cliff things are less clear at this
juncture so (it is) a fight between various influences."
Concerns over whether U.S. lawmakers will manage to strike a
deal to avert the "fiscal cliff" of steep tax increases and
spending cuts early next year has provided underlying support
for safe-haven debt in recent weeks.
EU finance ministers this week achieved a significant
breakthrough in talks over a "banking union" by agreeing that
the European Central Bank would be made the chief supervisor of
euro zone banks. European leaders also approved long-delayed aid
to Greece this week.
German bonds were flat across maturities, with the 10-year
bonds yielding 1.35 percent.
"They have taken an important step towards further
integration... Once you take this step, you are creating a
platform from which you can take another step," Elwin de Groot,
senior market economist at Rabobank, said.
"From the markets' perspective, this increased fiscal unity
is something that ultimately we believe... will have a negative
impact on the Bund."
In the short term, however, he expected German yields to be
capped by generally weak economic activity data, expansionary
monetary policy and worries about the U.S. budget talks.
De Groot saw 10-year yields holding around current levels as
year-end approached but with potential to fall to 1.30 percent.
Spanish and Italian bonds rose, after some selling this week
due to growing political tensions in Italy, following Prime
Minister Mario Monti's announcement at the weekend of his plan
to step down early.
Monti, seen as a guarantor of continued reform, faced
increasing pressure on Thursday to stand as a candidate in an
election expected in February after Silvio Berlusconi's surprise
offer to drop his bid for a fifth term as premier.
Ten-year Italian yields were down 4.5 basis
points at 4.60 percent, while the Spanish equivalent
was 3.2 bps lower at 5.39 percent.