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

By Ana Nicolaci da Costa

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

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

But ultra short-term Treasury bill yields hovered near 10-month highs on Friday on increasing concerns about the possibility of a U.S. government default.

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

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

"The perception will strengthen that they (Fed policymakers)are not going to have enough data to make any sensible judgment about tapering come December and that could also be fairly supportive (for Bunds)."

German Bund futures rose 21 ticks to 140.17, pushing 10-year German yields 1.8 basis points lower to 1.81 percent. Yields on 10-year bonds issued by highly rated France, the Netherlands, Belgium and Austria also fell one or 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 gets diminished. I think that's probably the reason why Treasuries and 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 to raise the U.S. debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of default.

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

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

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

Ten-year Spanish yields were little changed at 4.21 percent, but the yield premium against equivalent German debt was at 240 basis points, near its lowest in over two years hit on Friday.

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

"We are in a period where there is little value in the Bund below 1.80 (percent). There are limited upward pressures on yields driven by some better economic data as well as recent constructive developments in peripheral markets such as the review of the Troika in Portugal," said Patrick Jacq, European rate strategist BNP Paribas.

"In addition to this, we had some better news coming from Greece 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 the strongest signs yet that the country has left the worst of its crippling debt crisis behind.