EURO GOVT-Bunds reverse losses, Greece underpins core market
Thu May 26, 2011 7:24am EDT
* Bunds reverse losses as Greek worries underpin market
* Periphery supported by Chinese interest in bailout bonds
* Front end could squeeze higher ahead of ECB
By Kirsten Donovan
LONDON, May 26 (Reuters) - German government bonds reversed earlier losses on Thursday as Greek worries pushed investors towards core euro zone debt, but a report that
China is interested in buying bailout bonds for Portugal supported the wider periphery.
Bunds remained close to their highest levels since January as Greece seeks to agree tough new austerity measures to secure the release of further funds under its 110 billion euro bailout programme, vital to avoid default.
"
We know central banks are buying a lot of this kind of paper, it's just a bit of positive news amongst all the noise on Greece," said a trader.
"But there seems to be growing political dissent on further bailouts so it's really down to Greece to get their house in order."
Greek two-year bond yields are near 26.5 percent, while 10-year yields have topped 17 percent in recent sessions.
"We're 12 to 18 months into the period where the brakes have been put on and there are significant signs the populace are beginning to suffer austerity fatigue," said Shahid Ikram, deputy CIO and head of global sovereign at Aviva Investors.
"That's been a game changer ... and pushes towards the end game."
A Financial Times article quoted the chief executive of the European Financial Stability Facility as saying China was "clearly interested" in buying bonds for the
Portugal bailout to be issued in mid-June [ID:nL3E7GQ04U].
But traders and analysts played down the report, pointing out that the European Commission for example had seen plentiful demand for sales of five- and 10-year bonds this week to fund an assistance facility for Portugal.
The EFSF will also sell two more benchmark deals before the summer to add to January's blow out 5 billion euros five-year.
Rabobank strategist Richard McGuire also noted that the Chinese comments indicated support for the rescue mechanism rather than an impediment to further bailouts.
Although off the day's best levels, Spanish and Italian 10-year government bond yield spreads over Bunds tightened as the paper continued its recovery from a sharp sell-off on Monday when Standard and Poor's cut Italy's rating outlook, sparking fears the crisis was set to deepen further.
"
Italy is potentially worrying as we suspect a lot of people are long," said Nomura rate strategist Sean Maloney.
"But an outlook review doesn't necessarily mean things are going to change and if you want to pick-up periphery and country spread, Italy is the most liquid while EU officials continue to emphasise how different Spain is from the weaker peripherals."
The Spanish 10-year yield was last at 5.28 percent.
"Technically we've been in 5.20-5.60 percent range on Spanish 10-year yields. We got up to 5.60 percent on Monday and since then come off that quite hard," a second trader said.
"We're back towards the bottom of the range so would expect sellers to come back in around 5.20," he said.
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Graphic on Spanish and Italian bond performance versus Greek,
Ireland and Portugal
link.reuters.com/nyh79r
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RESISTANCE
June Bund futures FGBLc1 were 6 ticks higher at 124.87 having moved to test support at the week's low at 124.71. Resistance comes from Monday's high of 125.33.
"Below 124.71, you're looking at last week's low of 123.73," said the first trader.
"But there's enough risk out there to keep markets underpinned into the long weekend and I can't see us getting down there."
UK markets are closed on Monday.
Two-year bond yields DE2YT=TWEB were 1 basis points higher at 1.669 percent, with 10-year yields DE10YT=TWEB down half a basis point at 3.039 percent.
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