Bunds steady, supported by Greek woes
Fri Jun 17, 2011 4:44am EDT
* Bund steady but supported by Greek unease
* To remain supported even on early signs on deal
* Greek CDS prices top 2000 bps (Updates prices, adds comment)
By Kirsten Donovan
LONDON , Jun 17 (Reuters) - German government bonds were steady near six-month highs on Friday with Athens in political turmoil and EU policy makers seemingly no clearer on how to move forward with a new rescue package, crucial to avoid a Greek debt default.
The Greek Prime Minister is appointing a new cabinet -- including a new finance minister -- to muster support for painful economic reforms, despite public unrest and a split in his party .
The reforms are a condition for Greece receiving further aid and markets will be watching a Franco-German summit for any sign that the two European heavyweights are setting aside their differing stances and forging a deal on how to involve private bondholders in a rescue for Greece.
Euro zone finance ministers begin talks on Sunday but are not expected to agree a new aid package until at least early July.
Safe-haven assets were underpinned by the uncertainty with September Bund futures holding near 6-month highs and up 1 tick lower at 126.47.
And even if there are early signs European politicians are making progress, core government bonds are expected to remain well supported for now.
"There is potentially the risk for some sort of event trigger, a small relief rally in risk assets if the politicians look like they are moving closer to an agreement," said a trader.
"But there doesn't seem to be the political will in Greece to sort things out and if they don't want to play ball then there can be as many plans as they want but it won't change anything."
Greek 10-year bond yields were little changed around 18.46 percent, but the cost of insuring against a default rose 130 bps to 2025 basis points.
However, data monitor Markit said the number of quotes it was seeing for Greek protection had dropped significantly.
The increased cost of insuring
euro zone sovereign debt against default has pushed the Markit iTraxx SovX Western Europe index up to 238 bps, around 50 basis points higher than two weeks ago. Markit said volumes on Thursday were almost double the average for the month.
"The stakes are very high and the EU, European Central Bank and other officials can't let this drag on too much longer because you're already seeing signs of contagion to Spain, and even Italy," said Nick Stamenkovic, rate strategist at RIA Capital Markets.
Fears of contagion to Spain, which faces 22.45 billion euros of coupon and redemption payments next month remained heightened despite 10-year bond yields retreating from peaks hit after a lacklustre auction on Thursday. But they still closed at their highest level in 11-years and were last at 5.66 percent.
"The biggest uncertainty is what happens in Greece itself," said Stamenkovic.
"Even if the Prime Minister survives a confidence motion there's no guaranteee they'll put in place the right fiscal measures and even if they do, there's a lot of implementation risk."
European equities traded lower and were on track for their seventh straight weekly loss as investors shunned risk assets.
Two-year bond yields were down almost a basis point at 1.457 percent, with 10-year yields down a similar amount at 2.925 percent.
. Ma tu non gli dir niente che poi se ne accorgono 
