December 20, 2012 / 5:10 PM / 5 years ago

EURO GOVT-Impasse in U.S. fiscal talks lift Bunds

* U.S. budget impasse gives investors chance to buy back
    * Greek bonds under slight pressure after finmin comments
    * Markets not panicking over the U.S. "fiscal cliff"

    By Alistair Smout and Marius Zaharia
    LONDON, Dec 20 (Reuters) - Bunds firmed on Thursday as talks
to avoid large-scale fiscal tightening in the United States
seemed to be losing momentum, giving an opportunity for some
investors to buy back into cheapened German debt. 
    Financial markets have for weeks been sensitive to any
developments in negotiations to avert $600 billion of automatic
U.S. tax rises and spending cuts next year, which many fear
would tip the world's top economy into a recession.
    A deal had looked within reach as the two sides made
concessions, but the climate soured after Republicans announced
plans on Tuesday to put an alternative tax scheme to a vote this
week. On Wednesday, President Barack Obama threatened to veto
the Republican measure if Congress approved it. 
    Bund futures rose 18 ticks on the day to 144.33,
having fallen more than a point in the last 10 days. Ten-year
German yields were 1.4 basis points lower at 1.418
    "The Bunds are trading off the U.S. news, which was negative
overnight with regards to the fiscal cliff," said Lyn
Graham-Taylor, fixed income strategist at Rabobank.
    The size of the move was relatively small, however,
suggesting that investors were not panicking about the limited
time left for U.S. lawmakers to reach a compromise.
    "There are still some days left. Even if there's a delay
they can still reach a deal in early January. People expect
politicians to reach a deal," said Norbert Wuthe, rate
strategist at Bayerische Landesbank.
    That meant that even if they reach a deal, Bunds should not
suffer major losses, he said.
    Greece's bonds came under slight pressure after a sharp
rally in the previous session. Finance Minister Yannis
Stournaras said in the Financial Times the country was facing a
critical year ahead. 
    The yield on Greece's February 2023 bond 
was 12 bps higher at 11.74 percent. It fell well over a point in
the previous session as the European Central Bank decided to
once again accept Greek debt as collateral at its funding
    "Periphery-wise, there's a little bit of a systemic risk
increase over Greece, with the finance minister saying we're not
out of the woods yet," Graham-Taylor said.
    Though the outcome of the U.S. budget talks remains
uncertain, analysts say the consequences of the "fiscal cliff"
are potentially too dire for the White House and the Republicans
not to achieve a compromise.
    "The risk is too high (that) we can have a strong sell-off
in risky assets and that the U.S. economy will fall into
recession, so they will try to find an agreement for the end of
the year. They will push hard," ING's senior rates strategist
Alessandro Giansanti said.
    A deal would boost equity markets and safe-haven debt would
sell off, which could drive German 10-year yields to 1.55
percent but probably no higher: "The risks to the euro zone
economy are still present in the market so they will not
disappear because of (a) fiscal cliff agreement".
    Failure to reach an agreement before the end of the year
would push 10-year German yields towards 1.30 percent, Giansanti

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