EURO GOVT-Bunds edge higher, U.S. deficit worries dominate

* Mild recovery in U.S. debt halts sharp rise in yields

* Peripheral debt steady as U.S. tax cut plans lead market

* Potential for short-term retracement of recent yield jump

By William James

LONDON, Dec 9 (BestGrowthStock) – German Bund futures rose on
Thursday after a mild recovery in U.S. debt prices, but market
sentiment was dominated by the worries over the impact of U.S.
tax cuts which have sent benchmark bond yields higher.

March Bund futures (FGBLH1: ) regained some of the week’s 150
tick losses and were last 24 ticks higher at 124.63. German
yields edged lower, performing in line with debt from the weaker
euro zone states at the sharp end of the region’s debt crisis.

“There was a small recovery overnight, but it’s still all
very heavy for bonds. If we get the 30-year (U.S.) supply out of
the way tonight then we could be looking in slightly better
shape tomorrow,” a trader said.

A U.S. auction of 10-year notes (US10YT=RR: ) found decent
demand in the previous session, but analysts said it was not
enough to reverse the recent sharp climb in yields.[US/]

The 10-year German bond yield (DE10YT=TWEB: ) fell 2.6 basis
points to 2.991 percent, while the two-year Schatz yield
(DE2YT=TWEB: ) was flat at 1.01 percent.

Ten-year Bund yields have risen by around 40 basis points in
December, initially on concerns that a spreading euro zone
crisis could result in more costly sovereign bailouts. Rising
U.S. yields have added upward pressure after a deal to extend
tax cuts raised fear over the swollen U.S. budget deficit.

The rise in Treasury yields has outpaced that seen in German
debt, widening the spread between the two. U.S. 10-year debt
yielded 27 basis points more than euro zone benchmarks in early
trading, off a peak of 30 bps reached on Wednesday.

“We’ve outperformed, but Europe’s not really trading off its
own steam this week. The periphery has been a bit quiet,” a
trader said, highlighting a meeting of European Union leaders on
Dec. 16 and 17 as the next key event in the debt crisis.

RETRACEMENT POSSIBLE

European equities extended their recent rally to hit a
26-month high, boosted by the prospect of economic growth
stemming from the U.S. tax plans. [ID:nLDE6B8037]
[ID:nN08175057]

“Given the brutality of the moves we’ve seen in recent days
we may well have seen most of the negative news for bond
markets… but offsetting that you do seem to have a general
risk-positive drift,” said David Page, interest rate strategist
at Lloyds TSB in London.

Technical analysis outlined the potential for 10-year yields
to retrace some of those rises in the short term.

“We have become slightly concerned in Bunds that things have
moved too far, too quickly to the downside and that a recovery
is due over the short term to unwind downside extremes,” said
Richard Adcock, technical analyst at UBS.

Similarly, Nomura analysis pointed to a fall of over 20
basis points in Bund yields in November, which took place over
only two sessions, as precedent for an unwinding of the latest
steep rise to around 2.8 percent.

EURO GOVT-Bunds edge higher, U.S. deficit worries dominate