* German Bunds rise with deal on U.S. budget talks elusive
* Benchmark Italian debt turns flat after bond sale
* Liquidity thin between Christmas, new year holidays
By Marius Zaharia and Ana Nicolaci da Costa
LONDON, Dec 28 German Bunds rose on Friday as
investors sought safe-haven assets before a last-chance round of
talks in the United States aimed at averting a fiscal crisis
In Italy, government bonds erased minor early losses after a
sale of nearly 6 billion euros of five- and 10-year debt went
The focus was on developments in Washington where President
Barack Obama was due to meet lawmakers at 3:00 p.m. EST (2000
GMT) to try to revive efforts to avoid tax hikes and spending
cuts - together worth $600 billion - that will begin to take
effect on Jan. 1.
With the clock ticking, investors preferred to keep their
money in the safest and most liquid assets, such as Bunds and
Bund futures were last 20 ticks higher on the day
at 145.74, while German 10-year cash yields
dropped 1.7 basis points to 1.30 percent.
"The outcome (of U.S. budget talks) is still very
uncertain," said Daiwa Capital Markets economist Emily Nicol,
adding that safe-haven asset prices would have risen more
strongly if most investors had not already closed their books
for the year.
"I reckon you'll see a more negative reaction when investors
The market was still pricing in the likelihood of a U.S.
deal in early January that would imply a fiscal tightening in
the magnitude of 1 to 1.5 percent of gross domestic product,
Commerzbank rate strategist Rainer Guntermann said.
In this case, 10-year German yields could rise
to 1.40 percent, he said. In the absence of a deal, Guntermann
said 10-year yields would probably fall below 1.25 percent.
"Ultimately it would be a big surprise if they would allow
the economy to (completely) fall off the cliff," he said.
In Italy, even though borrowing costs at a debt auction rose
slightly compared with a previous auction, they were below those
in the secondary market, a sign of healthy demand, despite
growing nervousness about the impact for policy of an election
due in February.
"It seems that the result was better than expected, with the
yield on the 10-year lower than in the secondary market," said
Emile Cardon, market economist at Rabobank in Utrecht.
"The biggest fear for the market is that political turmoil
in Italy will return. But this outcome shows they still have
confidence that Italy will do the right things and I think this
has something to do with the comeback of Monti."
Mario Monti -- the outgoing technocrat Prime Minister, with
whom markets feel comfortable -- has said he would consider
seeking a second term if approached by allies committed to
backing his austere brand of reforms.
Ten-year Italian government bonds turned
higher after the auction, having been under pressure in early
trading. Yields were 1 basis point lower at 4.52 percent, having
stood at 4.55 before the results.
"It was a good auction," one trader said. "It looks like
there are enough buyers in the market, especially domestic