Euro zone debt broadly higher after U.S Congress deal


* Euro zone bonds rise across credit spectrum after deal

* Temporary nature of deal a worry, seen delaying Fedtapering

* Spain and France to sell bonds

By Ana Nicolaci da Costa

LONDON, Oct 17 (Reuters) - Euro zone debt rose across thecredit spectrum on Thursday as some investors bet a temporarydeal to avoid a U.S. debt default would delay any move by theFederal Reserve to scale back bond-purchases.

In an erratic response to the deal approved by the U.S.Congress, Asian and U.S. stock markets rose overnight butEuropean stock markets opened lower.

The short-term nature of the deal to some extent temperedrelief that a historic default had been avoided for now.

The deal does not resolve the fundamental issues of spendingand deficits that divide Republicans and Democrats, funding thegovernment only until Jan. 15 and raising the debt ceiling untilFeb. 7.

"They have kicked the proverbial can down the road and U.S.fiscal negotiations will restart early next year. Consequentlyit's going to be very difficult for the Fed to taper at thattime," Nick Stamenkovic, bond strategist at RIA Capital Marketssaid.

"As a result the market is increasingly confident that areduction of QE (quantitative easing) is unlikely to be on theagenda until well into 2014. So that's given Treasuries a boostand that's filtered through to Bunds."

German Bund futures jumped 52 ticks to 139.43,pushing 10-year German yields 4.5 basis pointslower to 1.89 percent.

They played catch-up to U.S. yields which havefallen more than 10 basis points from the previous day's highs.U.S. yields were down 3.3 basis points at 2.64 percent.

The yield spread between ten-year U.S. Treasuries andequivalent German Bunds tightened 5 basis points to 75 bps.

"Is it good that they have got a deal out of the way forTreasuries? I suppose it is (because) they are not going to gobust," one trader said. "It's only a short-term thing, it runsout in January, February time."

Other highly-rated euro zone debt was also higher.

Ten-year Dutch yields were 3.8 basis pointsdown at 2.26 percent, Austrian yields eased 4.2bps to 2.27 percent and equivalent French yields fell 3.8 basis points to 2.40 percent, even as investors awaiteda French bond sale.

France is set to sell 6.0-7.0 billion euros of fixed-rate,medium-term bonds and 1.0-1.5 billion euros of inflation-linkedbonds at an auction later.

Riskier periphery bonds also rose with ten-year Italianyields down 2.5 basis points at 4.22 percent.

Spanish yields were flat at 4.30 percent before an auctionof three-year and five-year paper.

"The overall appetite for risk has improved and that'sclearly supportive for the likes of Spain and Italy,"Stamenkovic added.

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