December 19, 2012 / 1:10 PM / in 5 years

EURO GOVT-Portuguese yields below 7 pct in choppy year-end trade

* Risk sentiment improves, benefits lower-rated debt

* Bunds fall on “fiscal cliff” optimism

* Markets choppy as Christmas, year-end approaches

By Ana Nicolaci da Costa

LONDON, Dec 19 (Reuters) - German Bunds fell in choppy trading on Wednesday as better German data and optimism on the U.S. fiscal outlook underpinned appetite for riskier assets, helping Portuguese yields below the 7 percent level.

European stocks rose and bonds issued by states in the euro periphery gained, taking Portuguese yields to their lowest since February 2011.

Greek debt prices also rose, thanks to improved sentiment towards the country as indicated by Standard & Poor’s decision to upgrade its sovereign credit rating to B-minus from selective default late on Tuesday. The European Central also said on Wednesday that Greek debt will again be eligible as collateral at its funding operations.

“There is the sense which is becoming mainstream in the market that Greece will remain in the euro area and probably we are approaching a (turning) point of this crisis,” Sergio Capaldi, fixed income strategist at Intesa SanPaolo said.

“Also the Ifo figure this morning helped spread this confidence.”

A survey from Munich-based Ifo think tank showed morale at German businesses climbed in December as their confidence in the outlook rose at its fastest rate in 2-1/2 years. .

The market’s reaction to the numbers was choppy but the Bund later resumed its downside.

German Bunds were down 28 ticks on the day at 144.13. Optimism surrounding U.S. budget talks also kept safe-haven debt under pressure.

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.”

APPETITE FOR SPAIN

Spanish and Italian yields have dropped since late July when ECB President Mario Draghi said the bank would do whatever it took to protect the euro, followed by the announcement of a bond-buying program if countries sought help.

Yields on ten-year Spanish bonds were 4.2 bps lower at 5.29 percent and the Italian equivalent fell 6.7 bps to 4.39 percent.

Ten-year Portuguese yields were 6.5 bps lower at 6.97 percent and the Greek equivalent fell 63 bps to 12.26 percent.

“I would recommend to buy Spain on the front of the curve, both outright or versus Italy,” Capaldi added. “It’s a one way bet.”

That’s because if you think it will need a bailout, you would have to price in central bank support, while any optimism on Spain would likely benefit that part of the curve most, he said.

Market participants, however, cautioned the market was erratic and price moves were exaggerated 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.

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