EURO GOVT-Peripheral spreads wider on Greek crisis, Spain vote
Fri May 20, 2011 5:39am EDT
* Uncertainty over response to Greek debt crisis continues
* Spain/Bund spread at widest since Jan in election run-up
* Disagreements among policymakers seen helping Bunds
By Ana Nicolaci da Costa
LONDON, May 20 (Reuters) -
The spread between peripheral bonds and German Bunds widened on Friday as disagreements between euro zone policymakers over how to tackle Greece's debt crisis and upcoming elections in Spain curbed appetite for risk.
The European Central Bank raised the stakes in its bid to prevent a restructuring of Greek debt by telling governments it would refuse to accept the bonds as collateral in the event of such a move.
The Greek saga would likely continue to support core assets, as would uncertainty over the impact Sunday's regional elections in Spain could have on the country's fiscal position.
"There is probably enough event risk out there in terms of Spanish elections and the Greek situation to keep markets underpinned into the weekend," said a London trader.
The June Bund future FGBLM1 was slightly higher at 124.18, recovering ground from the previous day's losses.
The gap between yields on peripheral bonds and German Bunds increased, led by some 58 basis points of widening in the 10-year Greek/German yield spread GRYT=TWEB.
Peripheral bonds were volatile in the previous session as the solution over a Greek debt crisis seemed increasingly harder to gauge, with RBS noting in a research note that the ECB's threats not to accept Greek collateral were inconsistent with its mandate to defend financial stability.
Investors would keep an eye on possible comments by ECB members later in the session for any further insight.
Concerns over contagion to other peripheral countries also resurfaced, particularly in regard to Spain, the euro zone's fourth largest economy.
While it has broadly managed to decouple itself -- or trade independently from -- weaker euro zone economies in many debt investors' eyes, analysts fear it could eventually fall victim to the crisis that forced Ireland, Portugal and
Greece to seek financial aid.
The Spain/Bund 10-year yield spread ES10YT=TWEB DE10YT=TWEB traded at its widest since mid-January at 236 basis points, up 8 basis points on the day after a lacklustre Spanish bond auction in the previous session and ahead of regional elections.
"If you get a series of opposition victories it may at the margin increase Spain's vulnerability to a negative change in market sentiment," Richard McGuire, rate strategist at Rabobank said.
Spain's Socialist government, reaching the end of a second four-year term marked by austerity and the worst recession in half a century, faces major losses to the opposition Popular Party in local elections on Sunday.
