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EURO GOVT-Greek yields fall, Bunds dip on Greek aid hopes
Tue May 31, 2011 4:27am EDT
* Greek bond yields lower on report of German concessions
* EU/IMF agreement could see yield curve disinvert
* 10-year Bund yields top 3 pct as risk appetite picks up
By Kirsten Donovan
LONDON, May 31 (Reuters) - Greek bond yields edged lower on Tuesday as a report that Berlin may make concessions to clear the way for a new aid package for Greece boosted appetite for riskier assets.
The pick-up in sentiment saw German Bunds slip with 10-year yields nudging back above the key 3.0 percent level but uncertainty over the way forward for debt-laden Athens kept the safe-haven paper near four-month lows.
The European Union is racing to draft a second bailout package for Greece to avert the risk of a debt default after the International Monetary Fund said it could withhold a tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for the next year .
The Wall Street Journal Germany said Berlin was considering concessions in efforts to support the country by dropping its push for an early rescheduling of Greek bonds.
Analysts said a "yes" decision from the IMF to release the funds could see the market push back expectations of a Greek debt restructuring.
"Yields would fall across the curve and we could easily see yields down hundreds of basis points at the front-end of the curve and given where bid/offer spreads are that wouldn't be a large move," said ING rate strategist Padhraic Garvey.
"It would provide greater support for the front end and we could see the yield curve disinvert and especially 2012 maturities doing quite well."
Greek bond yields were 20 to 40 basis points lower across the curve on Tuesday but with two-year yields still near 26 percent and a bid/offer spread of over 300 cents reflecting the severe illiquidity in the market. June Bund futures FGBLc1 were 48 ticks lower at 125.21, having broken through the support offered by Friday's low of 125.33.
"People have been thinking the rally is overdone, but it keeps going and keeps sucking them in," said a trader.
"Shorts are being stopped out by the day and we will need to see two or three days of bearish trading to be able to call the top to this rally but until we get something sorted regarding Greece we can stay in the up trend."
Two-year bond yields DE2YT=TWEB rose 5 bps to 1.636 percent and 10-year yields DE10YT=TWEB were up a similar amount, squeezing up to 3.03 percent.
"Bunds have had a fantastic run and are due a bit of correction," said ING's Garvey.
"Even so, if the IMF say no that could be supportive for Bunds although the market could decide that means Germany has to foot the bill if it is looking for an excuse to lock down this rally."
The positive tone spread throughout the wider periphery with the Spanish/German 10-year yield spread narrowing 10 basis points to 232 bps and the Italian equivalent in 8 basis points.
However, the potential knock-on effect from any Greek default was highlighted as Fitch cut Cyprus's sovereign rating to A- from AA-, saying it was concerned at the high level of exposure its banks had to Greek debt and the impact that it could have on the island's finances.
Worries about the ability of the euro zone banking system to withstand a sovereign debt default or restructuring and about other lower-rated states eventually taking a similar step has been a key factor supporting Bunds.
Tue May 31, 2011 4:27am EDT
* Greek bond yields lower on report of German concessions
* EU/IMF agreement could see yield curve disinvert
* 10-year Bund yields top 3 pct as risk appetite picks up
By Kirsten Donovan
LONDON, May 31 (Reuters) - Greek bond yields edged lower on Tuesday as a report that Berlin may make concessions to clear the way for a new aid package for Greece boosted appetite for riskier assets.
The pick-up in sentiment saw German Bunds slip with 10-year yields nudging back above the key 3.0 percent level but uncertainty over the way forward for debt-laden Athens kept the safe-haven paper near four-month lows.
The European Union is racing to draft a second bailout package for Greece to avert the risk of a debt default after the International Monetary Fund said it could withhold a tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for the next year .
The Wall Street Journal Germany said Berlin was considering concessions in efforts to support the country by dropping its push for an early rescheduling of Greek bonds.
Analysts said a "yes" decision from the IMF to release the funds could see the market push back expectations of a Greek debt restructuring.
"Yields would fall across the curve and we could easily see yields down hundreds of basis points at the front-end of the curve and given where bid/offer spreads are that wouldn't be a large move," said ING rate strategist Padhraic Garvey.
"It would provide greater support for the front end and we could see the yield curve disinvert and especially 2012 maturities doing quite well."
Greek bond yields were 20 to 40 basis points lower across the curve on Tuesday but with two-year yields still near 26 percent and a bid/offer spread of over 300 cents reflecting the severe illiquidity in the market. June Bund futures FGBLc1 were 48 ticks lower at 125.21, having broken through the support offered by Friday's low of 125.33.
"People have been thinking the rally is overdone, but it keeps going and keeps sucking them in," said a trader.
"Shorts are being stopped out by the day and we will need to see two or three days of bearish trading to be able to call the top to this rally but until we get something sorted regarding Greece we can stay in the up trend."
Two-year bond yields DE2YT=TWEB rose 5 bps to 1.636 percent and 10-year yields DE10YT=TWEB were up a similar amount, squeezing up to 3.03 percent.
"Bunds have had a fantastic run and are due a bit of correction," said ING's Garvey.
"Even so, if the IMF say no that could be supportive for Bunds although the market could decide that means Germany has to foot the bill if it is looking for an excuse to lock down this rally."
The positive tone spread throughout the wider periphery with the Spanish/German 10-year yield spread narrowing 10 basis points to 232 bps and the Italian equivalent in 8 basis points.
However, the potential knock-on effect from any Greek default was highlighted as Fitch cut Cyprus's sovereign rating to A- from AA-, saying it was concerned at the high level of exposure its banks had to Greek debt and the impact that it could have on the island's finances.
Worries about the ability of the euro zone banking system to withstand a sovereign debt default or restructuring and about other lower-rated states eventually taking a similar step has been a key factor supporting Bunds.
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