December 19, 2012 / 10:18 AM / in 5 years

EURO GOVT-Bunds fall on U.S. budget optimism, but trade choppy

* Bunds extend recent losses, still up on the month
    * Hopes for 'fiscal cliff' deal hurts Bunds
    * Market reaction to German Ifo business climate survey

    By Ana Nicolaci da Costa
    LONDON, Dec 19 (Reuters) - German Bund futures fell on
Wednesday, extending recent losses as growing expectations that
U.S. lawmakers will manage to avert a fiscal crisis favored
riskier assets at the expense of safe-haven debt.
    But a choppy reaction to a German business climate survey
showed trade was erratic as investors adjusted positions before
Christmas and the end of the year. 
    "Books are generally positioned to be flat in the weeks
before Christmas. This year, markets have gone into shutdown
mode earlier than they have done in the past," Brian Barry,
fixed income analyst at Investec said.
    German Bund futures, after seven straight sessions
of losses, were a further 20 ticks lower at 144.21. The contract
however was still up on the month and on the year.
    Hopes of a U.S. budget accord rose this week after President
Barack Obama made a concession, offering to limit tax increases
to incomes exceeding $400,000 per household - a higher threshold
than the $250,000 he had sought earlier. 
    In the case of a deal, Bunds would "knee-jerk down but I
don't see why we are going to collapse on it. I don't think
that's the only reason Bunds have been reasonably well bid
recently," a trader said.
    "The growth outlook in Europe looks awful and those
forecasts are presumably based on the fiscal cliff getting
sorted out."
    Data on Wednesday showed Germany's Ifo business sentiment
index climbed for the second month running in December.
    Bunds pared losses right after the release but then fell
back again.
    The optimism surrounding U.S. budget talks remained even as
Republicans in the House of Representatives announced Tuesday
night that they expect to pass their own tax bill as a backup
plan to avert the tax hikes and automatic budget cuts set to
occur in January. 
    Elwin de Groot, senior market strategist at Rabobank, said
this was likely a tactic to try to get more concessions from the
Democrats, who were unlikely to budge, and could further delay a
deal markets are hoping will be struck before the new year.
    Even a compromise would likely result in some fiscal
tightening which would curb U.S. economic growth, analysts said.
    "The market is really optimistic, maybe over-optimistic, on
the fiscal cliff," Jean Francois Robin, head of strategy at
Natixis said. 
    Technical charts pointed to further weakness in the Bund,
with Commerzbank pointing out it had broken key technical
support at 144.50.
    But market players warned against reading too much into the
price moves in thin year-end liquidity.
    "Everyone is shut for the year. People have got their books
how they want, there is very little going on," he added.
    Ten-year Spanish yields were 1.7 basis points
lower at 5.31 percent and Italian yields fell 5.1
bps to 4.41 percent.
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