EURO GOVT-Italy, Spain yields fall on Greek deal but market wary
* Greek deal implementation doubts limit gains in riskier assets
* Portugual initially comes under pressure; still seen as next to seek new bailout
* German 10-yr yields seen capped just below 2 pct
By Emelia Sithole-Matarise
LONDON, Feb 21 (Reuters) - Italian and Spanish government bond yields fell on Tuesday after Greece secured a new bailout to avert an unruly default but the relief rally in lower-rated debt was likely to be short-lived on worries over Athens' ability to implement strict conditions.
Portuguese bonds missed out on the modest gains in peripheral euro zone peers, with its debt yields rising on bets that it may be next in line after Greece to seek another international bailout.
The measures agreed by euro zone officials after protracted talks are meant to cut Greece's debt to 120.5 percent of gross domestic product by 2020, a fraction above their initial target of 120 after negotiators for private bondholders accepted deeper losses to help plug the funding gap.
Italian 10-year government bond yields fell 11 basis points to 5.37 percent while equivalent Spanish yields were eight bps lower at 5.09 percent but traders said much of the news on Greece had already been priced in.
Doubts that Greece would follow through on strict conditions attached to the deal, given its chequered history, were also likely to keep safe-haven German 10-year yields capped just below the 2 percent level that has formed the upper limit of this year's range.
"There's still a lot of implementation risk ... It will give risk a short-term relief rally till the next hurdle ... There's quite a lot of good news priced into risk assets already ... So potentially we see some buyers on any back-up in (German) yields," a trader said.
The Bund future was last 16 ticks down on the day at 137.81. A decisive break below the previous session's low of 137.85 is seen triggering falls to the Feb. 12 low of 136.93, according to UBS technical analyst Richard Adcock.
German 10-year yields were 2.5 basis points up at 1.989 percent with the 2 percent level seen holding as investors fret that a new bailout did nothing to ultimately resolve Greece's long-term debt problems.
"For now, imminent disaster looks likely to have been averted or perhaps rather diverted as Greece's debt position will arguably remain untenable, thereby ensuring the country continues to represent a key threat to market sentiment for some considerable time to come," Rabobank strategists said in a note.
The value of Greek default insurance contracts rose as the debt swap deal with private bondholders could trigger payment on credit default swaps.
Private bondholders faced increased losses under the terms of the latest 130 billion euro aid package, with Greece prepared to use "collective action clause" (CAC) legislation to force unwilling creditors into a debt swap - a move expected to cause a payout of default insurance.
"There's a bigger haircut for bondholders in the deal and that's probably a factor," said Markit analyst Gavan Nolan.
Greek CDS contracts were quoted at 71 points up front, up from 69 points on Monday. This means the cost of a $10 million five-year CDS contract was $7.1 million, payable at the start of the agreement.
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