EURO GOVT-Greek restructuring spat buoys Bunds
Fri Jun 10, 2011 4:35am EDT
* Bunds rally on Greek restructuring disagreement
* Peripheral yields rise, including Spain and
Italy
* Bund market positioning points to continuing support
LONDON, June 10 (Reuters) -
German government bonds extended gains on Friday with a spat over what form any Greek debt restructuring may take weighing on bonds issued by the region's most debt-laden countries and supporting lower-risk assets.
The European Central Bank on Thursday rejected any form of debt restructuring for Greece, which is favoured by Germany where members of parliament agreed a motion demanding the fair participation of private creditors in any future bailout. [ID:nLDE75828B]
"Given the importance of both actors -- Germany as the biggest doner and the ECB as the biggest holder of Greek bonds -- it doesn't really help to stabilise the situation," said WestLB rate strategist Michael Leister.
"So we're seeing another widening of spreads but more indicative of what is going on is that Spain and Italy are also widening."
Spanish bonds underperformed at the 10-year maturity with the yield spread over Bunds 7 basis points wider at 248 bps, approaching the critical 250-255 bps region, which has provided strong resistance in the past.
Similarly, outright 10-year yields ES10YT=TWEB -- which have risen around 20 basis points this week -- at 5.48 percent look set to test the top of their trading range at 5.60 percent.
"Key now will be whether these levels trigger buying interest from range traders or whether we break through, thereby providing a meaningful signal of spreading contagion," said Rabobank rate strategist Richard McGuire.
RAGING RHETORIC
Plans for a second bailout of Greece are taking shape, with euro zone sources telling Reuters on Thursday the deal would total about 120 billion euros.
But analysts have said the plan still represents a liquidity solution to a solvency problem. "With the German government making it clear that bondholders have to share the pain something has to give," said Gary Jenkins, head of fixed income at Evolution Securities.
"If they are not careful it might be Greece via the worst case scenario which would be an uncontrolled default."
An "uncontrolled" default would see the sovereign missing a payment on its debt when due, whereas an orderly restructuring or similar would be agreed by euro zone politicians, the IMF and the ECB. September Bund futures FGBLU1 were 26 ticks higher at 125.44, breaking above the 14-day moving average of 125.34.
Two-year German bond yields DE2YT=TWEB were down 2.5 bps at 1.593 percent. Ten-year yields DE10YT=TWEB headed back to the key resistance level at 3.0 percent, down 1.3 bps at 3.01 percent.
Bunds rose despite the ECB signalling it would raise interest rates in July -- something markets had already priced in, but expectations for further interest rate hikes were scaled back.
"It can't be 100 percent certain the ECB will hike next month. Four weeks is a long time in Europe at the moment," a trader said.
"The market still seems to be massively short and that will be enough to ensure that buying on dips is the way forward."
Bunds are also likely to remain supported into next week with a large volume of supply looming, the highest weekly amount so far this year, according to Commerzbank.
Spanish and Italian debt sales will be closely watched and other issuers include Germany,
France and the Netherlands.
"Spain could be tricky, a 15-year sale is brave, especially as it's not the most liquid point on most curves anymore but it shows they are not afraid to go for it," WestLB's Leister said, adding he expected the auction to be supported by domestic demand and the dealer community.
