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EURO GOVT-Greek two-yr yields fall after vote, relief limited
By Kirsten Donovan
LONDON, June 22 | Wed Jun 22, 2011 4:36am EDT
LONDON, June 22 (Reuters) - Two-year Greek bond yields fell on Wednesday after the government won a confidence vote, the first step to winning new financing, but relief was limited with a debt restructuring still seen as inevitable.
Markets had anticipated the vote would be passed. German Bunds fell and Greek government bonds rose on Tuesday before the result as investor appetite for riskier assets improved.
But the respite for Greek debt was seen as temporary with Prime Minister George Papandreou having to push through key fiscal reforms next week in order to secure the 12 billion euro lifeline readied by international lenders to save Greece from near-term default.
"It's not over," a trader said.
"The question is what happens if, arguably when, they miss their targets later in the year. Contagion is a very quick growing animal."
Athens also has to implement the reforms, while policymakers have yet to finalise a second rescue package. Ratings agencies have warned changes to the terms of existing bonds could be considered as a default. .
"The Greek vote is clearly a positive, but we've only cleared one hurdle of many," said Rabobank rate strategist Richard McGuire.
"There is still the near-term risk that policymakers may not be able to agree the issue of 'bail ins" for sector involvement in any debt restructuring."
Greek two-year government bond yields were 30 basis points lower at 28.20 percent but longer-dated spreads were stable or a touch wider.
The cost of insuring against a default was 57 basis points higher at 1,900 bps with Reuters calculations based on Markit CDS prices showing the probability of default based on a 40 percent recovery rate at still above 80 percent.
Yields on the euro zone's other highly indebted issuers were mixed. Spanish and Italian yields modestly extended the previous sessions falls but those on Portuguese and Irish five- and 10-year bonds were up to 15 basis points wider.
Indeed, Portuguese 10-year yields have risen almost two percentage points during June.
"Portugal has fallen between the cracks a bit, with the Greek bailout battle and worries Spain will also succumb," McGuire said.
"But this is restructuring contagion, the consideration of a Greek restructuring raises fears others will follow, just as they did after Greece was the first to be bailed out."
That, coupled with the still many unanswered questions over Greece, means safe-haven debt is expected to remain well supported for now.
September Bund futures were flat at 125.89. Two-year bond yields were down half a basis point at 1.534 percent, with 10-year yields unchanged at 2.982 percent.
The confidence vote may also take some of the shine off a 4 billion euro auction of 10-year Bunds, the euro zone benchmark, although the sale is still seen going smoothly.
"On most criteria, we find that the 10-year Bund is rich. Investors need to decide whether it is worth paying the extra premium for a bond that profits from risk aversion," Societe Generale strategists said.
With the first Greek hurdle cleared, the result of the U.S. Federal Reserve's policy meeting and comments from Fed Chairman Ben Bernanke will draw attention later in the day, with the central bank likely to acknowledge renewed weakness in the U.S. economy.
"In a world without the Greek situation, the focus would be on the question of the strength of the economic recovery, but again, it's already somewhat in the price," the trader said.
By Kirsten Donovan
LONDON, June 22 | Wed Jun 22, 2011 4:36am EDT
LONDON, June 22 (Reuters) - Two-year Greek bond yields fell on Wednesday after the government won a confidence vote, the first step to winning new financing, but relief was limited with a debt restructuring still seen as inevitable.
Markets had anticipated the vote would be passed. German Bunds fell and Greek government bonds rose on Tuesday before the result as investor appetite for riskier assets improved.
But the respite for Greek debt was seen as temporary with Prime Minister George Papandreou having to push through key fiscal reforms next week in order to secure the 12 billion euro lifeline readied by international lenders to save Greece from near-term default.
"It's not over," a trader said.
"The question is what happens if, arguably when, they miss their targets later in the year. Contagion is a very quick growing animal."
Athens also has to implement the reforms, while policymakers have yet to finalise a second rescue package. Ratings agencies have warned changes to the terms of existing bonds could be considered as a default. .
"The Greek vote is clearly a positive, but we've only cleared one hurdle of many," said Rabobank rate strategist Richard McGuire.
"There is still the near-term risk that policymakers may not be able to agree the issue of 'bail ins" for sector involvement in any debt restructuring."
Greek two-year government bond yields were 30 basis points lower at 28.20 percent but longer-dated spreads were stable or a touch wider.
The cost of insuring against a default was 57 basis points higher at 1,900 bps with Reuters calculations based on Markit CDS prices showing the probability of default based on a 40 percent recovery rate at still above 80 percent.
Yields on the euro zone's other highly indebted issuers were mixed. Spanish and Italian yields modestly extended the previous sessions falls but those on Portuguese and Irish five- and 10-year bonds were up to 15 basis points wider.
Indeed, Portuguese 10-year yields have risen almost two percentage points during June.
"Portugal has fallen between the cracks a bit, with the Greek bailout battle and worries Spain will also succumb," McGuire said.
"But this is restructuring contagion, the consideration of a Greek restructuring raises fears others will follow, just as they did after Greece was the first to be bailed out."
That, coupled with the still many unanswered questions over Greece, means safe-haven debt is expected to remain well supported for now.
September Bund futures were flat at 125.89. Two-year bond yields were down half a basis point at 1.534 percent, with 10-year yields unchanged at 2.982 percent.
The confidence vote may also take some of the shine off a 4 billion euro auction of 10-year Bunds, the euro zone benchmark, although the sale is still seen going smoothly.
"On most criteria, we find that the 10-year Bund is rich. Investors need to decide whether it is worth paying the extra premium for a bond that profits from risk aversion," Societe Generale strategists said.
With the first Greek hurdle cleared, the result of the U.S. Federal Reserve's policy meeting and comments from Fed Chairman Ben Bernanke will draw attention later in the day, with the central bank likely to acknowledge renewed weakness in the U.S. economy.
"In a world without the Greek situation, the focus would be on the question of the strength of the economic recovery, but again, it's already somewhat in the price," the trader said.
