London: German government bonds traded close to two-month highs on Friday, with anxiety over Greece’s debt sustainability and the US “fiscal cliff” pushing investors towards the safety of low-risk assets.

Greece has taken centre stage in the three-year-old euro zone crisis as its international lenders squabble over how to make its debt sustainable, delaying a €31-billion (Dh146 billion) aid payment necessary to keep the country afloat.

Although Athens is expected ultimately to secure the cash and avoid default this year — something which has helped push Greek bond yields lower in recent sessions — analysts and traders say a lasting solution may prove elusive.

Eurozone finance ministers meet again next Tuesday, with IMF Managing Director Christine Lagarde saying a deal should be forged.

Gary Jenkins, director of Swordfish Research, said any deal would be only a short-term fix.

“On Tuesday night we’ll know how they’re going to kick the can down the road and there will probably be a sense of relief some kind of agreement has been reached and that will probably help Spanish bonds as well,” he said.

“In the meantime, the underlying data is probably not going to improve so there’s going to be continued pressure on these sovereigns.”

Financing gap

The IMF wants a solution that would bring Greek debt down to 120 per cent of economic output by 2020 but a senior Eurozone source told Reuters this week that finance ministers would only attempt to close the financing gap to 2014.

December Bund futures were 6 ticks lower at 143.07, trading in a tight range but holding close to Tuesday’s two-month high of 143.48. Ten-year German yields were down half a basis point at 1.35 per cent.

The spread of 10-year Greek bond yields over Bunds was last around 1,600 basis points, its lowest in just over a week, but still around 100 basis points more than a month ago.

“It would be a big shock if they didn’t get funding this year as there doesn’t seem to be any appetite for trouble ahead of next year’s German elections, so we’re probably going to see a fudged solution for now,” a trader said.

The EU’s top economic official sought on Thursday to rule out any write-off of Greece’s debt to governments. The IMF argues a write-down is necessary to put the country on a sustainable financial path.