EURO GOVT-Bunds supported by higher Treasuries after auction

* Bunds steady, supported by Treasury rebound after auction
* Non-German yields edge up as politicians disagree

* 2-10 yield curve flattens as steepener traders unwind

By Kirsten Donovan

LONDON, Dec 10 (BestGrowthStock) – German government bonds held
steady on Friday as U.S. Treasuries, the main driver for Bunds
this week, rebounded after a strong auction of 30-year debt.
The $13 billion of reopened bonds sold at a yield below that
on the open market, indicating investors bid aggressively for
the debt, with strong demand particularly from foreign buyers.

“Treasuries had a great auction but they sold off so much
going into it that Bunds are not going to get as much benefit as
you might think,” a trader said.

Analysts meanwhile, said that although economic fundamentals
pointed to higher yields in the euro zone as well as the United
States, this week’s sell-off, which pushed 10-year Bund yields
above 3 percent, had been overdone.
“The sell-off has been extreme and some relief could be
expected,” said Norbert Aul, rate strategist at RBC Capital
Markets.

“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.”

March Bund futures (FGBLc1: ) were 11 ticks higher at 125.06,
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. The slide in Treasuries added momentum.

Two-year German yields were flat at 1.028 percent, 10-year
yields (DE10YT=TWEB: ) half a basis point lower at 2.946 percent.

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.

“We’re seeing a lot of steepener traders being taken off, it
had probably just gone too far for now,” the trader said.

That has led to an underperformance of two-year bonds since
a sale of German paper on Wednesday failed to attract fewer bids
than the amount on offer. The yield on that paper is now 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 9 bps at 5.41 percent ahead of auctions next week.
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Graphic on the euro zone debt crisis

http://r.reuters.com/hyb65p
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Investors waited for developments in efforts to quell the
debt problems of some of the region’s members and were focused
on divisions among EU leaders, who meet next week.

President Nicolas Sarkozy and Chancellor Angela Merkel meet
on Friday to prepare joint Franco-German positions for the
summit. Both reject proposals for euro zone bonds
[ID:nLDE6B823X].

But Eurogroup chairman Jean-Claude Juncker said the common
bonds would exist one day [ID:nLDE6B9077], while 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-Bunds supported by higher Treasuries after auction