January 2, 2012 / 9:01 AM / 6 years ago

EURO GOVT-Bunds slip after stellar year but still supported

* Bunds slip after stellar year
    * But set to remain supported as debt crisis rumbles on
    * Germany, France to kick-off year's issuance this week

    LONDON, Jan 2 (Reuters) - German government bonds
slipped on Monday after posting stellar returns in 2011, but
with Asian, British and U.S. markets closed for New Year
holidays trading volumes were extremely thin.	
    Policymakers marked the 10th anniversary on Sunday of the
introduction of euro notes and coins by urging governments in
the currency bloc to save and consolidate to overcome their debt
    The next few months will be critical for the euro zone with
the crisis far from resolved and threatening to engulf Italy
which has around 100 billion euros of bond redemption and coupon
payments to meet in the first four months of the year, according
to Reuters data. 	
    "The debt crisis is still a massive obstacle for the whole
of 2012," said ING rate strategist Padhraic Garvey. 	
    "For the next couple of weeks it may well feel okay although
I think it will be a false sense of positivity and ultimately
we'll fall back to where we left off last year which wasn't a
very pretty place." 	
    Demand for liquid German paper was reflected in a year-end
rally which saw Bund futures gain over 5 points in
December. But while Bunds may remain well bid and possibly test
new highs, they may not see another year as good as 2011 for
some time. 	
    German paper returned almost 10 percent across the curve
last year and longer-dated paper almost 20 percent
, according to the Markit iBoxx indexes.	
    "We expect a brief consolidation in the 10-year area of the
curve after year-end buying has supported Bunds over recent
sessions," said Commerzbank rate strategist David Schnautz.	
    "A test of the 2 percent (yield)... should fail over coming
days, though, as the inaugural 2012 bond issuance activities by
Spain and Italy should come in focus soon."	
    Germany and France will kick off the new year's debt
issuance with bond sales on Wednesday and Thursday. Italy and
Spain, the most closely watched issuers, will begin their
challenging quests for funding in 2012 the following week. 	
    Ten-year Italian bond yields were steady
around 7.05 percent, levels which raise concerns over the
country's ability to fund itself over the longer term.	
    Yields came under pressure last week after a disappointing
bond auction, prompting Prime Minister Mario Monti to call for
reinforcement of the euro zone's bailout fund and the European
Central Bank to step in to the secondary market.	
    Meanwhile, Spain's new government said on Friday that this
year's budget deficit would be much larger than expected and
announced a slew of surprise tax hikes and wage freezes
. Spanish ten-year yields were little changed.	
    Banks are flush with liquidity after taking almost half a
trillion euros of three-year funding from the ECB last month,
but most of that was still making its way back to the central
bank with more than 400 billion euros deposited overnight
    The dislocation in the interbank market was reflected in
overnight borrowing figures from the ECB which were close to 15
billion euros despite the ample liquidity.   	
    March Bund futures were 35 ticks lower at 138.69,
having quickly retreated from an opening high of 139.32.
Benchmark 10-year yields were one basis points
higher at 1.853 percent.	
    Rating agency Standard & Poor's is expected to decide in
January whether to downgrade up to 15 euro zone countries
including Germany and France which it has on creditwatch
    Adding to the gloomy outlook, data confirmed euro zone
manufacturing activity declined for a fifth consecutive month in
December and pointed to a strong likelihood of further declines
in the first quarter of the new year.
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