Bunds fall further as U.S. debt deal seen close

Reuters

By Marius Zaharia

LONDON, Oct 16 (Reuters) - Safe-haven German Bunds fell onWednesday, pushing yields to fresh three-week highs, asinvestors expected U.S. lawmakers to reach a last-minute deal toraise the debt ceiling and avoid a potential default.

After a day of stop-and-go negotiations, Senate leaders weresaid to be close to agreeing a debt deal that would also reopenthe partially shut government. Earlier expectations that a dealcould be announced late on Tuesday were not met.

The U.S. government is expected to reach its borrowing limitby Thursday. If a deal is not reached by then, default ongovernment obligations could quickly follow, freezing the U.S.financial sector and threatening the global economy.

Bund futures, which usually find support in timesof uncertainty as they are considered low-risk assets, were last8 ticks lower at 139.16, while cash 10-year German yields hit fresh three-week highs at 1.926 percent.

They moved in line with U.S. 10-year T-notes,which were last up 2 basis points at 2.74 percent.

"People still think they'll get a last-minute deal of somesorts," one trader said, adding that the lack of panicking inthe market throughout the budget negotiations meant that theimpact of any deal would be limited in time and scope.

"It's been a fairly orderly crisis. If we do get a deal,presumably it's going to be temporary in nature and I don't knowif we'll sell off much. This crisis will probably weigh on dataso the downside is fairly cushioned."

Some signs of stress were visible in short-dated U.S.securities, however. October T-bill yields traded above 0.50 percent, some 15-20 bps more thantwo-year yields. Investors would normally ask for a higherpremium to hold longer maturities.

The lingering uncertainty in the United States is likely tosecure some bids at a sale of up to 5 billion euros of two-yearGerman bonds later on Wednesday, some analysts said.

The main supporting factor for the auction, however, wouldbe a domestic one as investors expect the European Central Bankto keep monetary policy relaxed for a prolonged period.

"The Schatz auction should go well. Expectations regardingECB policy ... are keeping the short-end anchored," UniCreditrate strategist Luca Cazzulani said.

Other euro zone bonds were also steady.

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