Euro zone yields edge lower as U.S. shutdown concerns creep in

Reuters

By Ana Nicolaci da Costa

LONDON, Oct 7 (Reuters) - Low-risk euro zone bonds inched upon Monday, with investors nervous about the lack of progress inresolving the U.S. budget standoff as a mid-October deadline forraising Washington's debt ceiling approaches.

Markets have so far taken the first U.S. government shutdownin 17 years - now in its seventh day - in their stride, focusingmainly on the fact that it is likely to delay any plans by theFederal Reserve to start scaling back its bond-buying programme.

But ultra short-term Treasury bill yields hovered near10-month highs on Friday on increasing concerns about thepossibility of a U.S. government default.

"There didn't seem to be much sign of any progress over theweekend so net-net it seems to be a slightly constructiveenvironment for bonds and it's enabling Bunds to maintain thelower yield levels," ICAP strategist Philip Tyson said.

"The longer (the U.S. shutdown) goes on, the more it willimpact activity in the final quarter of the year ...

"The perception will strengthen that they (Fedpolicymakers)are not going to have enough data to make anysensible judgment about tapering come December and that couldalso be fairly supportive (for Bunds)."

German Bund futures rose 21 ticks to 140.17,pushing 10-year German yields 1.8 basis pointslower to 1.81 percent. Yields on 10-year bonds issued by highlyrated France, the Netherlands, Belgium and Austria also fell oneor two basis points.

"Everything seems to be up marginally," one trader said.

"Probably the debt ceiling has got something to do with it,in that the bigger the impasse, the more the growth outlook getsdiminished. I think that's probably the reason why Treasuriesand Bunds are up a bit."

Neither side in the U.S. budget fight seems to be budging.

Republican House Speaker John Boehner vowed on Sunday not toraise the U.S. debt ceiling without a "serious conversation"about what is driving the debt, while Democrats said it wasirresponsible and reckless to raise the possibility of default.

Ten-year U.S. Treasury yields were 1.8 basispoints lower at 2.63 percent. Concerns over default are mostlyaffecting the very short end of the U.S. Treasury curve.

"Probably for peripherals it's just the overhang from lastweek's resolution of Italy and so on," the trader said.

Italian yields fell 1.7 basis points to 4.30percent after the Italian government won a vote of confidencelast week.

Ten-year Spanish yields were little changed at4.21 percent, but the yield premium against equivalent Germandebt was at 240 basis points, near its lowest in over two yearshit on Friday.

Portugal's 10-year paper was also flat at 6.46percent, having hit its lowest yield in over a month on Fridayafter international lenders approved the country's performanceunder a bailout in their latest review.

"We are in a period where there is little value in the Bundbelow 1.80 (percent). There are limited upward pressures onyields driven by some better economic data as well as recentconstructive developments in peripheral markets such as thereview of the Troika in Portugal," said Patrick Jacq, Europeanrate strategist BNP Paribas.

"In addition to this, we had some better news coming fromGreece so this environment is favourable for tighter spreads."

Greece will emerge from six years of recession next year,its draft 2014 budget projected on Monday, in one of thestrongest signs yet that the country has left the worst of itscrippling debt crisis behind.

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