EURO GOVT-Bund yields rise as focus shifts back to euro zone

* Bund yields rise as rally looses steam

* Non-German yields edge up as politicians disagree

By Kirsten Donovan

LONDON, Dec 10 (BestGrowthStock) – German government bond prices
fell on Friday, failing to build on the previous session’s rally
as politicians disagreed over measures to resolve the euro
zone’s sovereign debt crisis.

Higher equities also lessened the appeal of Bunds, which had
attempted to extend gains in early trade after U.S. Treasuries,
the main driver for the market this week, rebounded after a
strong auction of 30-year debt.

“The year-end environment is not providing material support
for Bunds which suggests systemic and fundamental risks are
still driving forces,” said Lena Komileva, head of G7 economics
at Tullett Prebon, adding a rise in riskier assets was
undermining support for safe-haven bonds.

Analysts said that although economic fundamentals pointed to
higher euro zone and U.S. yields, this week’s sell-off, which
pushed 10-year Bund yields above 3 percent, had been overdone.

“There could be more selling going into the quieter year-end
period but we think 10-year Bund yields should continue to find
support at the 3 percent mark, while next week’s European
Council meeting poses an event risk,” said Norbert Aul, rate
strategist at RBC Capital Markets.

March Bund futures (FGBLc1: ) were flat at 124.95, having
earlier risen as far as 125.33.
The contract marked record highs in September of 134.77 but
has sold off sharply since, partly on concerns over how much it
would cost Germany if more euro zone countries needed financial
assistance. This week’s slide in Treasuries added momentum.

“The growing positive correlation between core and
peripheral bonds maintains concerns about the possibility of a
negative feedback loop if German collateral is extended to
contain the spreading sovereign debt crisis in 2011,” Tullet’s
Komileva said.

German two (DE2YT=RR: ) and 10-year (DE10YT=RR: ) yields were
2bps higher at 1.041 percent and 2.958 percent respectively.

The area around 3.08 percent — Wednesday’s high — is seen
as strong resistance for 10-year yields — representing the 38
percent retracement of the fall in yields since the start of the
financial crisis in late 2008.

The spread between two- and 10-year bonds has narrowed more
than 20 basis points since Wednesday to around 190 basis points,
led by an underperformance of two-year bonds since a weak sale
of German two-year paper on Wednesday. The yield on that debt is
10 bps higher than the average yield at the auction (DE113732=: ).

NON-GERMAN BOND YIELDS EDGE HIGHER

Bonds issued by highly-indebted euro zone countries
underperformed German counterparts. Ten-year Spanish bonds were
the worst performers, with yields up 8 bps at 5.4 percent ahead
of auctions next week.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on the euro zone debt crisis

http://r.reuters.com/hyb65p
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Investors focused on divisions among European Union leaders,
who meet on Dec. 16 and 17 to discuss the debt crisis.

President Nicolas Sarkozy and Chancellor Angela Merkel meet
on Friday to prepare Franco-German positions for the summit.

Both reject proposals for common euro zone bonds
[ID:nLDE6B823X], though Eurogroup chairman Jean-Claude Juncker
said they would exist one day [ID:nLDE6B9077].

The European Central Bank’s Mario Draghi said the bank’s
independence could come under attack if it acts too aggressively
to support euro zone bond markets [ID:nN09256153].
ECB bond buying has been the only line of defence against
widening peripheral spreads in the absence of co-ordinated
political action, but traders said the pace of buying, which had
increased early this week, had tapered off again .

“The ECB buying feels like morphine to the periphery right
now but the sad truth is that the ECB buying…is making matters
worse by giving a false impression of stability to politicians
eager to cement the current negotiations,” RBS strategists said.

EURO GOVT-Bund yields rise as focus shifts back to euro zone