EURO GOVT-Greek yields fall on fresh aid hopes, Bunds slip
Tue May 31, 2011 12:49pm 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
William James and Kirsten Donovan
LONDON, May 31 (Reuters) -
Greek bond yields fell on Tuesday as investors sought out higher-yielding assets after reports that German opposition to more aid for Greece was softening, though relief in the market was likely to be short-lived.
European officials met to sketch out options for a second bailout package, and the Wall Street Journal said Berlin was considering dropping its push for an early rescheduling of Greek bonds.
"Anything on the Greek situation which shows an improvement is welcome in the near term but at the end of the day it's only a sticking plaster over the problem to buy them time," said Alan McQuaid chief economist at Bloxham Stockbrokers in Dublin.
Greek bond yields were 40 to 50 basis points lower across the curve on Tuesday, led by the short end, but two-year yields were still near 26 percent and a bid/offer spread of over 300 cents reflected the severe illiquidity in the market.
The pick-up in risk appetite saw safe-haven German bonds suffer. Bund futures FGBLc1 slid by more than half a point and cash market yields pushed above 3.0 percent on 10-year debt.
Analysts said the next key event in Greece's battle to avoid default and get its public finances back on track was a report on the country's progress towards meeting austerity targets.
The report will determine whether Greece receives the next 12 billion euro tranche of rescue cash from the IMF, key to meeting 13.7 billion of imminent funding needs.
If the IMF decides to release the next batch of bailout funding, the market could then push back its 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."
BUNDS
June Bund futures FGBLc1 settled 34 ticks lower at 125.35, having failed to break technical support at the 125.00 level.
"People have been thinking the rally is overdone, but it keeps going and keeps sucking them in," a trader said.
"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 uptrend."
A second trader said the market still felt short, meaning few were positioned for a further rise in prices, but the trader added that much of the day's selling came from central banks.
Two-year Bund yields DE2YT=TWEB rose 3 bps to 1.61 percent and 10-year yields DE10YT=TWEB climbed 4.6 bps to 3.02 percent.
The positive tone spread through other lower-rated states with the Spanish/German 10-year yield spread narrowing as much as 11 bps to 230 bps and the Italian equivalent 10 bps.
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.
"We have a 'glass half empty' view of the whole crisis... we think it is going to intensify," said Rabobank strategist Richard McGuire.
If Spanish 10-year yields, currently at 5.36 percent, were to rise above 5.6 percent that could confirm that the crisis was spreading, McGuire said.
"
If we become more confident that the crisis is spreading then we could enter a riskier, more volatile trade. One that we might consider would be to short Italy versus Belgium."
