December 27, 2012 / 9:36 AM / in 5 years

EURO GOVT-Debt market steady as U.S. budget deal deadline nears

* U.S. fiscal cliff debate continues
    * Safe-haven Bunds steady, markets not panicking
    * Italian yields inch higher before debt sale

    By Marius Zaharia
    LONDON, Dec 27 (Reuters) - Euro zone debt markets were
little changed on Thursday, with investors focused on last-ditch
efforts by U.S. lawmakers to avoid major fiscal tightening from
automatically coming into force next year.
    The United States could face about $600 billion of tax hikes
and spending cuts in 2013 if Democrats and Republicans fail to
find common ground in budget negotiations, potentially sending
the world's biggest economy back into recession. 
    But even if a compromise is not reached before the end of
the year - as initially expected - budget measures could be
agreed in January and enforced retroactively, analysts said.
    "Safe-haven assets (such as Bunds) should remain supported
as long as the fiscal cliff debate remains unsolved,"
Commerzbank rate strategist Rainer Guntermann said.
    "But there is no sense of panic. The market has come to some
sort of understanding that the end of December is not an
extremely hard deadline."
    Bund futures were last 12 ticks higher on the day
at 144.89, having traded in a relatively narrow range of
144.62-144.94 through the session in thin volumes.
    In a sign that there may be a way to break the budget
deadlock, Republican House of Representatives Speaker John
Boehner offered to consider any bill the Democrat-controlled
Senate produced. 
    President Barack Obama returns to Washington on Thursday and
investors expect the talks to avoid a fiscal crisis to resume.
    Some traders said the relative sense of calm in the market
may be misleading as many investors have closed their books for
the year.
    "It's a strange one given the lack of developments on the
fiscal cliff," one trader said of the lack of volatility in the
market. "But I think at the end of the day people are just not
doing much (trading) given that it's the end of the year."
    Debt issued by the euro zone's lower rated states was also
broadly stable. 
    Italian 10-year yields were 5 basis points
higher at 4.53 percent as some investors sold the paper to make
room for new supply of five- and 10-year paper due on Friday,
when Rome holds its last debt auction of the year.
    Commerzbank's Guntermann expected the sale to go through
smoothly as the treasury "probably ensured enough domestic
    Political developments in Italy will be closely watched next
year as analysts expect a potentially bitter election campaign
to increase uncertainty over whether the country can continue to
implement debt-cutting reforms.
    Outgoing technocrat Prime Minister Mario Monti - a figure
investors felt comfortable with - said he was available for a
second term, but opinion polls are inconclusive.
    "The market has already priced in more (turmoil) with
regards to elections. It is in a balanced state of uncertainty
at the moment," Guntermann said.

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