By Emelia Sithole-Matarise
LONDON, Oct 11 (Reuters) - German 10-year yields held nearthree-week highs on Friday as prospects U.S. politicians willreach a deal to lift the country's debt ceiling, averting anear-term default, lifted stocks at the detriment of safehavens.
Bunds gave up opening gains made after a solid U.S. 30-yearbond auction on Wednesday, as a rise in European equitiesundermined flows into fixed income.
President Barack Obama and Republican leaders appeared readyto end a deadlock over the debt stalemate after a meeting at theWhite House on Thursday. Talks continued into the night and onesenior Republican said an agreement could come on Friday, thoughhurdles remained.
"Risks if anything are more to the downside for core bonds,"said Mathias van der Juegt, a strategist at KBC in Brussels.
"I believe the chances are higher that we might get someshort-term agreement on raising the debt ceiling so risks aremore to the downside for core bonds because of the U.S. holidayon Monday but I don't expect a big move."
German 10-year yields were at 1.87 percent, their highest innearly three weeks while U.S. 10-year T-noteyields were flat in European trade at 2.68 percent.The Bund future was last 2 ticks up at 139.67
German 10-year yields saw their biggest daily rise in amonth on Thursday as signs Washington was inching towards ashort-term deal cooled demand for safe havens and lifted riskierassets.
Very short-term U.S. Treasury bill rates have come off peakshit this week as signs of progress have emerged. Some in themarket still saw risks, with a potential deal before Monday'sU.S. public holiday seen providing only a brief respite.
"Looking beyond the very short-term, then, this could havenegative implications somewhat further down the road," Rabobankstrategists said in a note.
"Indeed, while this hard borrowing limit would avoid apotential default scenario in the very near future, there is arisk that, if the Democrats and Republicans cannot make a dealin time, the government will approach another potential defaultscenario towards the end of November. This might then startlemarkets again."
The rebound in riskier assets and ebbing political tensionsin Italy provide a positive environment for Rome to round upthis week's raft of euro zone debt sales with an auction of upto 6 billion euros in bonds.
Italy and Spain took advantage of benign market conditionsto sell new seven-year and 31-year bonds respectively onWednesday, drawing robust demand.
Friday's Italian bond auction is also expected to draw solidinterest as Rome capitalises on a relief rally after thegovernment won a confidence vote last week, easing concernsabout political instability.
Italian 10-year yields were steady at 4.33percent while Spanish equivalents were 0.7 bps lower at 4.34percent.
- President Barack Obama