Bunds edge up as euro zone still vulnerable

LONDON:

All EU countries except Britain agreed at a summit on Friday to pursue stricter budget rules and a stronger fiscal union, but the capacity of the euro zone's bailout fund was capped and it was not granted a banking licence.

That will put further pressure on the European Central Bank to step up its purchases of Italian and Spanish government bonds and keep their borrowing costs at levels that are affordable at least in the short-term.

With no signs that the bank was willing to accept such a role, uncertainty and fears that the currency union may eventually break up will continue to dominate markets.

"It's hard to strip out what's real flow and what's risk taken off the table for year-end. There is a dissection of the summit going on," one trader said.

"The ECB is playing down doing any more bond purchases ... The summit is maybe being viewed as not an end-all solution. We remain of the view that we are not out of the woods yet and we will be looking for chances to put more long Bund positions at some stage."

At 0706 GMT, Bund futures were 20 ticks higher at 135.57, after opening lower. German 10-year yields were 1.4 basis points down at 2.088 percent.

France, the Netherlands and Italy are due to issue Treasury bills later in the day. Short-term Dutch yields are close to zero as some investors look to preserve their cash in top-quality paper and avoid bank deposits.

Bids from retail clients should ensure a "decent" bid/cover ratio at Italy's 12-month bill sale of "1.7 or above", Credit Agricole strategists said in a note.

Bond sales by Italy and Spain later this week will be an important test of post-summit sentiment.