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Low-risk euro zone bonds firm on U.S. budget stalemate
October 7, 2013 / 4:07 PM / 4 years ago

Low-risk euro zone bonds firm on U.S. budget stalemate

By Emelia Sithole-Matarise and Ana Nicolaci da Costa

LONDON, Oct 7 (Reuters) - Low-risk euro zone bonds pushed higher on Monday as the U.S. budget standoff entered its second week without signs of an early resolution, raising concern about its impact on economic growth.

Safe-haven German Bunds outpaced the rest of the euro zone market as global equities fell with investors fretting that the standoff, which has led to the first U.S. government shutdown in 17 years, could lead to a mid-October showdown over raising Washington’s borrowing limit.

Investors were also focused on the release on Wednesday of minutes from last month’s Federal Reserve policy meeting, which could reveal more about why the central bank wrong footed markets by deciding not to begin trimming its bond purchase programme yet.

The longer the government shutdown lasts, the less likely the Fed is to begin cutting back on bond purchases, especially as it is unable to view government-issued data to gain a sense of the strength of the economy.

“The market clearly is gradually moving into a risk-off state of affairs which is clearly supportive of Bunds and paradoxically for some people also for Treasuries,” said Matteo Regesta, a strategist at Citi.

“The market is not really looking at the credit implications but more at the fiscal implications of these developments.”

Bund futures rose 35 ticks to settle at 140.31 while cash German 10-year yields were 3 basis points down at 1.80 percent.

Equivalent Belgian, Austrian, French and Dutch yields were also lower by 2 to 3 basis points.

UPWARD PRESSURE ON YIELDS LIMITED

Neither side in the U.S. budget fight seems to be budging.

Republican House Speaker John Boehner vowed on Sunday not to raise the U.S. debt ceiling without a “serious conversation” about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of default.

Ten-year U.S. Treasury yields were 2.7 bps lower at 2.62 percent. Concerns over a potential default are mostly affecting the very short end of the U.S. Treasury curve, with investors fretting they might not be repaid for short-term bills if the impasse drags on.

Yields on lower-rated euro zone bonds were steady to slightly lower, with Italian yields down 2.3 bps at 4.30 percent after the Italian government won a vote of confidence last week.

Ten-year Spanish yields were little changed at 4.21 percent, but the yield premium against equivalent German debt was at 241 basis points, near its lowest in over two years hit on Friday.

Portugal’s 10-year bond yield was 3 bps down at 6.42 percent, its lowest in over a month after international lenders approved the country’s performance under a bailout in their latest review last week.

“We are in a period where there is little value in the Bund below 1.80 (percent). There are limited upward pressures on yields driven by some better economic data as well as recent constructive developments in peripheral markets such as the review of the Troika in Portugal,” said Patrick Jacq, European rate strategist BNP Paribas.

“In addition to this, we had some better news coming from Greece so this environment is favourable for tighter spreads.”

Bailed-out Greece will emerge from six years of recession next year, its draft 2014 budget projected on Monday.

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