EURO GOVT-Bunds buoyed as investors seek to reduce risk

* Bunds rise on U.S. Treasury bounce after sell-off

* Bund resistance at 125.66, break may signal rise to 127.12

* Periphery steady despite little resolution from EU summit
(Changes lead, byline, adds quote, CDS info, updates prices)

By Emily Flitter

LONDON, Dec 20 (BestGrowthStock) – German government debt prices
rose on Monday as investors sought to reduce the risk on their
books ahead of the year end and tensions on the Korean peninsula
encouraged the safe-haven bid.

Debt yields in countries affected by the euro zone debt
crisis were steady, with the exception of Irish debt, which
continued to sell off as Moody’s downgrade of the country on
Friday reverberated around the marketplace.

A rebound in U.S. Treasury prices also helped drive Bunds’
rally.

“Treasuries have built on their recent rally and I think
that’s helping Bunds too on the margin,” said Nick Stamenkovic,
bond strategist at RIA Capital Markets in Edinburgh.
“Technically the market was oversold and I think people thought
3.50 (percent yield) on the 10-year Treasury was a very
attractive level.”

Meanwhile, the cost of insuring French sovereign debt
against default rose to a record high, according to data monitor
Markit. [ID:nLDE6BJ1G1]

Analysts said the lack of any fresh decisive action from
European leaders at last week’s summit to address the debt and
banking issues dogging the euro zone’s higher-yielding
sovereigns made markets uneasy.

“They seem to have got to the idea that they need to do
something, but we don’t have something that would make people
turn around and say ‘Ok, that fixes the problem’,” said Charles
Diebel, head of market strategy at Lloyds TSB.

European Union leaders agreed on Thursday to create a
permanent financial safety net from 2013 and the European
Central Bank said it would almost double its capital to cope
with bigger credit risk and market volatility.

“We got the latest ECB bond purchase figures — they only
bought about 600 million (euros), which is a drop compared to
last week — I don’t think you can depend on the ECB to come in
in size on a regular basis,” Stamenkovic said.

Yields on Portuguese (PT10YT=TWEB: ) and Spanish debt
(ES10YT=TWEB: ) were little changed versus Friday’s levels.

Irish 10-year bonds (IE10YT=TWEB: ) rose 16 basis points as
investors took in the ECB’s “serious concerns” that a new law in
Ireland could force the central bank to take losses on the
collateral it accepts in exchange for loans to commercial banks.
[ID:nLDE6BJ05R]

“If (the ECB) have got concerns over the seniority of the
collateral that they will take then obviously that’s a problem,
but I don’t think this will be a huge sticking point — some
sort of compromise can be hammered out,” Diebel added.

The Bund future (FGBLc1: ) was off its session high but
remained 92 ticks higher at 125.30.

North Korea earlier threatened to strike back if the South
went ahead with military drills near their disputed border, but
later said it would not react. [ID:nL3E6NK01M]

The 10-year German bond yield (DE10YT=TWEB: ) was 2.958
percent, down 7.1 basis points, while the two-year Schatz yield
(DE2YT=TWEB: ) fell 3.7 basis points to 1.028 percent.

Although the correction in yields may extend a little
further, German yields were unlikely to move far from key levels
of 1 percent in two-year debt and 3 percent on 10-year bonds,
said Credit Agricole rate strategist Orlando Green.

Bund futures earlier hit a session high of 125.34,
approaching a key resistance level at 125.66, which marks the
upper boundary of the short-term declining channel in place
since mid-November.

A break above this could open the door for a rise to 127.12,
which acted as a floor for the contract back in June, according
to Societe Generale charts.

Less than 403,000 Bund futures contracts had been traded by
1600 GMT, well down on average volumes.
(Additional reporting by William James; Editing by Ruth
Pitchford)

EURO GOVT-Bunds buoyed as investors seek to reduce risk