EURO GOVT-Bunds hold at high levels as investors remain edgy

Thu Nov 15, 2012 11:58am EST

Related Topics

* German debt supported by worries over Greece and Spain

* Hunt for higher yields helps non-German bonds outperform

* Bunds seen remaining steady, Spanish stress to re-emerge

By William James

LONDON, Nov 15 (Reuters) - German Bund futures stayed at elevated levels for a fourth straight day and traded in a tight range on Thursday, with little sign of a near term let-up in the tension over Greece and Spain's debt problems.

Investors' demand for low risk assets has benefited German debt in recent weeks as wrangling over urgently needed aid payments to Greece drags on, and with Spain still showing little inclination to ask for the bailout markets believe it needs.

The continued uncertainty helped Bund futures hold above the 143 level for a fourth straight session, settling one tick lower on the day at 143.13 but within reach of the two-month high of 143.48 seen last Friday.

Nevertheless, as investors were forced to hunt for investment alternatives offering better returns, debt issued by higher-yielding countries also found some buyers, narrowing the yields spread over German debt.

"The stress level is still tremendously high, and that explains the levels of the Bund yield," said David Schnautz, strategist at Commerzbank in New York.

"But spreads should eke in a little bit, slowly and surely because obviously you can't get rich buying Schatz," he said, referring to two-year German bonds which currently offer a below-zero yield for investors.

French 10-year bond yields fell 1.5 basis points on the day to 2.087 percent, while Italian and Spanish equivalent yields fell by 4.5 and 7.5 basis points on the day respectively - though all of the moves were within recent ranges.

The gains in slightly riskier assets was aided by economic output data. Although GDP data showed the euro zone has slipped into its second recession since 2009, the numbers were not as dire as some had expected and prompted mild relief.

"The data was more or less in line with consensus and as such there's probably a little bit of relief that it isn't worse," a trader said.

MEDIUM TERM STEADY

Even though top-level European Union discussions over how to solve Greece's debt problems were holding up the release of its latest aid payment, markets were still expecting the money to be paid out in time to avoid the shock of an outright default.

Nevertheless, while Greece has been a major factor in driving up safe-haven asset prices in recent weeks, a resolution there was unlikely to lead to a substantial sell-off that would push German bond yields higher.

"Pricing out any near-term accident risks in Greece is good for maybe a couple of basis points but let's say 'post-Greece' will certainly be 'pre-Spain' - we don't have to look very far to find supportive features for Bunds," Schnautz said.

Spain is battling high debt levels, made worse by the latest data showing its economy is sinking deeper into recession, but Madrid appears to be in no hurry to request international aid while it can still borrow at affordable rates.

However, those affordable borrowing rates are predicated on a bailout request unlocking the European Central Bank's bond-buying support, leaving investors in an uncomfortable standoff with the Spanish government with no sign of resolution.

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