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EURO GOVT-Uncertainty over U.S. elections, Greece support Bunds

Ana Nicolaci da Costa and William James
Friday, 2 Nov 2012 | 5:11 PM ET

* Focus turns to U.S. elections after payrolls

* Bunds remain in tight ranges

* Greece returns to the forefront of investors' minds

Nov 2 (Reuters) - German Bund futures rose on Friday but failed to break out of a recent range as many investors shied away from taking large positions before next week's U.S. vote and with Greece again facing crisis.

Bunds hit a session low after data showed the U.S. economy generated more jobs in October than expected but German bonds quickly recovered those losses.

``The reaction (to the U.S. elections) will be large because it is very uncertain what we are going to get. At the moment, (it seems) we will probably get (President Barack) Obama back but the swing states are very close,'' David Keeble, global head of fixed income strategy at Credit Agricole said.

A recent poll showed the race between President Obama and Republican nominee Mitt Romney is very close in four of the critical battleground states expected to decide Tuesday's election, with the president enjoying a small lead in Virginia.

``Greece is getting very messy. I think that's also potentially why you are seeing a (rise) in Treasuries and Bunds (into) the weekend,'' Keeble added.

German Bunds saw a settlement close of 141.87, up 16 ticks on the day. Treasury prices also came off their lows as traders turned their attention to next week's presidential election.

Data showed U.S. employers added 171,000 jobs to their payrolls last month, more than the 125,000 expected in a Reuters survey - a sign of unexpected strength in a lacklustre economy that has been a drag on Obama's re-election chances.

Analysts are divided on the impact an Obama versus Romney victory would have on financial markets. Some argue that equities would rally at the expense of safe-haven bonds on the back of a conservative government which tends to favour tax cuts.

Others say that a Romney victory would raise fears that the Fed's so far expansionary monetary policy would be unwound, so that stocks would rally if Obama won.

Bunds have briefly broken above the 142 to 141.18 trading range over the last three sessions, but Clive Lambert, technical analyst at Futurestechs, said ``that 142 level has been a real problem.''

The next chart resistance comes at the contract's late August highs of 142.60, and beyond that the Aug. 2 high around 143.40, he said.

GREEK DANGERS RISING

Events within the euro zone also deterred market participants from long-term investment as Greece, where the bloc's debt crisis began three years ago, threatened to provide another flashpoint.

Greece's deepening recession has put public finances under increasing strain and international lenders are struggling to reach an agreement with Athens on giving it more time to reduce its debt burden.

A parliamentary vote next week on 13.5 billion euros of contested austerity measures is key to negotiations with international authorities, with the outcome increasingly uncertain. One Greek lawmaker quit the co-ruling Socialist party on Thursday in protest over the package.

``There remains the possibility that they could reach some kind of impassable stumbling block,'' said Investec analyst Brian Barry, adding that another Greek debt restructuring could ``reopen the Pandora's box'' of a country leaving the currency bloc.

Greek debt was steady on the day, stabilising after a sell-off on Thursday, but the tension has prompted some more opportunistic investors who bought Greece's bonds at ultra-cheap levels to sell and book profits.

Bonds issued by Spain and Italy, who have been in the focus of the debt crisis for much of the year, traded within recent ranges. Ten-year Spanish and Italian bonds yielded 5.7 percent and 4.95 percent respectively.