Bunds supported by Korea, ratings threats

LONDON: German government bonds were steady early on Monday, supported after the death of North Korean leader Kim Jong-il raised fears of regional instability, weighing on riskier assets.

Bunds were also supported after credit rating agency Fitch warned it may downgrade France and six other euro zone countries as it believes a comprehensive solution to the region's debt crisis is "technically and politically beyond reach" .

Markets are already braced for mass downgrades after Standard and Poor's put 15 euro zone countries, including Germany, on credit watch negative.

"On Korea we will have to wait and see what happens but in the meantime we have enough problems here in Europe," said a trader.

"Rating cuts are priced in to a degree but it's the start of a vicious cycle and it has implications for the (euro zone rescue fund) so it's not good and there's no reason why Bunds can't stay underpinned into year-end."

Euro zone finance ministers will discuss at a teleconference the draft text of the new euro zone fiscal compact so that it can be finalised by the end of January, EU officials said. They will also consider the size of individual bilateral loans to the International Monetary Fund.

March Bund futures were 7 ticks lower at 138.49 with a break above Friday's high of 138.86 needed to open the way to September's high of 139.19 and ultimately the euro-era high of 139.58 hit in November.

Trading is expected to fade over the course of the week, adding to volatility, after volumes dropped below 400,000 lots on Friday

Ten-year yields were a third of a basis point lower at 1.86 percent.

Kim Jong-il died of a heart attack while on a train trip, state media reported, as investors braced themselves for the instability a leadership transition in the unpredictable North could bring to the wider region.

Copyright Reuters, 2011