EURO GOVT-Bunds off session highs, bargain hunting supports

* Bunds rise on U.S. Treasury bounce, pare early gains

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

* Periphery steady despite little resolution from EU summit

By William James

LONDON, Dec 20 (BestGrowthStock) – Bund futures tracked U.S. debt
prices higher on Monday as some investors returned after a
recent selloff, but early gains made on heightened tension in
Korea were pared and moves were exaggerated by low volumes.

The Bund future (FGBLc1: ) was off its session high but
remained 41 ticks higher at 124.79. The rise matched gains in
U.S. Treasury futures (TYv1: ) posted after European trading hours
on Friday, with buyers picking up bargains after a sharp selloff
through December.

“Today really is a function of some catch-up with the U.S.
market, which is why we’re still up on the day, while taking
back some of the exaggerated opening move related to tension on
the Korean peninsula,” said Marc Ostwald, strategist at Monument
Securities in London.

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 3.0 percent,
down 2.9 basis points while the two-year Schatz yield
(DE2YT=TWEB: ) fell 0.8 basis points to 1.057 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 125.28,
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 250,000 Bund futures contracts had been traded by
1230 GMT, well down on average volumes.

PERIPHERY STEADY

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.

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

Irish debt (IE10YT=TWEB: ) was steady relative to Bunds
despite 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 — I think
some sort of compromise can be hammered out,” Diebel added.
(Reporting by William James; Editing by Susan Fenton)

EURO GOVT-Bunds off session highs, bargain hunting supports