November 15, 2012 / 7:11 AM / 5 years ago

EURO GOVT-Bunds open higher as U.S. fiscal cliff looms

LONDON, Nov 15 (Reuters) - German government bonds opened higher on Thursday on fears of a protracted gridlock in negotiations over the looming U.S. “fiscal cliff” which threatens to tip the economy back into recession.

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 .

German Bund futures were 21 ticks higher at 143.35.

“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.”

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 recent pick-up in demand for lower-risk assets and the small additional yield the paper offers versus equivalent German issues means demand is expected to be good.

“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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