EURO GOVT-Bunds fall with Treasuries, Spanish auction looms

* Concession builds before Spain’s 10-yr and 15-yr auctions

* U.S. Treasuries’ earlier losses weigh on Bund prices

* EU summit outcome likely to be “technical,” analyst says

By Emily Flitter

LONDON, Dec 16 (BestGrowthStock) – German government bond yields
edged up on Thursday following a sell-off in U.S. Treasuries,
while other euro zone debt cheapened ahead of a Spanish bond

Traders also awaited a meeting of European Union leaders
trying to agree the next steps in tackling a debt crisis that
has seen Greece and Ireland take international rescue packages
and threatens to spread to Portugal and Spain. [ID:nLDE6BE29I].

U.S. Treasury prices fell late on Wednesday during New York
trading, and the benchmark 10-year Bund seemed to track the
losses during European hours on Thursday.

“The U.S. market is a key driving force,” said Patrick Jacq,
interest rate strategist at BNP Paribas in Paris.

“U.S./euro spreads are mainly driven by the tone of the
market in the U.S., especially in the five to 10-year area.”

Investors have been selling Treasuries fairly steadily since
the U.S. government announced a plan to extend a series of tax
cuts. The plan led economists to raise their forecasts for U.S.
growth, but also spurred fears the budget deficit could spin out
of control.

Ten-year U.S. Treasury yields (US10YT=RR: ) hit fresh
seven-month highs on Wednesday and yields were still around 7
basis points higher on Thursday than at the previous day’s
European settlement close.

March Bund futures (FGBLc1: ) were 6 ticks lower at 124.17.
Two-year bond yields (DE2YT=TWEB: ) were 1 basis point higher at
1.078 percent, with 10-year yields (DE10YT=TWEB: ) three tenths of
a basis point higher at 3.034 percent.

Jacq said the EU meeting was significant to the peripheral
debt markets in the three- to four-year area, where yields would
theoretically ease if a path to stability seemed clear. However,
he said much of the possible impact of the meeting had already
been priced into the market.

Graphic on euro zone debt crisis

EU leaders are planning to sign off on a permanent fund to
stabilise struggling euro zone countries. They are also expected
to make private investors shoulder more of the burden of
spiralling sovereign debt yields by taking haircuts on the bonds
they hold in the event of a restructuring. [ID:nLDE6BE1JV]

“All these discussions will probably be more technical than
a big political announcement or a big economic announcement,” he
said of the summit.


Traders sold Spanish 10-year bonds ahead of an auction of up
to 3 billion euros in reopened 10-year and 15-year bonds.

The auction comes a day after credit rating agency Moody’s
said it may downgrade Spanish debt.

“The focus will be on the Spanish supply which should get
done with a decent concession, and on the EU summit, although
they are probably just going to rubber-stamp what we know
already,” a trader said.

Spanish 10-year bond yields (ES10YT=TWEB: ) were around 5.5
percent on Wednesday, up around 20 basis points this month.

“While the (auctions) have spooked the market for quite a
while, we have no doubts (they) will produce decent results,”
said Commerzbank rate strategist Marcel Bross.

“The scary part of them – the massive concession move in
Spanish government bonds beforehand – should be through and we
look for substantial relief in Spain and also Italy into and
over year end.”

Traders said there had been some small-scale European
Central Bank bond purchases of Irish and Portuguese debt on
Wednesday, which had helped stabilise the periphery.

A measure of private sector economic activity in Germany
showed acceleration reaching a four-year high on Thursday.

A flash estimate of Markit’s purchasing managers’ index
survey showed a composite measure of the manufacturing and
services sectors rising to 59.7 from 59.0 in November, its
highest since June 2006. [ID:SLAFNE6KI].

(Additional reporting by Kirsten Donovan)

EURO GOVT-Bunds fall with Treasuries, Spanish auction looms