LONDON: German government bond prices dipped on Wednesday as investors anticipated more Federal Reserve stimulus and on hopes that US lawmakers were getting closer to reaching a budget deal.
An acceptable result in Greece's debt buy-back operation and calmer Italian debt markets as they reassess Prime Minister Mario Monti's decision to step down earlier than expected also weighed on German debt.
The US Federal Reserve is expected to announce a fresh round of bond buying on Wednesday as part of its efforts to support a fragile economic recovery threatened by political wrangling over the government's budget.
Economists polled by Reuters expect the Fed to announce it will replace its expiring Operation Twist programme with a fresh $45 billion per month of bond buying that will further expand the US central bank's $2.8 trillion balance sheet. It will also commit to keep buying $40 billion per month in mortgage-backed securities, as announced in September.
Traders say that if the Fed delivers on the expectations, a rally that has taken European shares to 18-month highs could continue. That in turn could weigh on safe-haven assets outside the United States, such as Bunds.
"The Fed dominates the landscape. Markets will be disappointed if (no more stimulus is announced), they are waiting for somewhere between $40 billion and $50 billion of monthly buyings," one trader said.
Bund futures were last 22 ticks lower on the day at 145.19.
But monetary stimulus may not be enough to sustain US economic growth if lawmakers cannot reach a budget deal to avert $600 billion of automatic fiscal tightening measures due to come into effect early next year.
President Barack Obama and US House of Representatives Speaker John Boehner spoke by phone on Tuesday to exchange new proposals, in what investors saw as a sign of progress in efforts to avoid the fiscal cliff.
"It is a very fluid situation, but I think the pendulum has swung to being a little bit more positive this week," the same trader said.
Center>Copyright Reuters, 2012
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