EURO GOVT-Peripheral bonds rally on Greek buy-back pricing
* Pricing on Greece debt buy-back higher than expected
* Details boost sentiment towards periphery
* Bunds reverse gains, seen sensitive to U.S. budget talks
* Limited reaction to Spain's formal request for EU bank aid
LONDON, Dec 3 (Reuters) - Greek government bond prices rallied on Monday after details were announced of its debt buy-back - a central part of a deal to release aid funds to the crippled economy.
Yields on other lower-rated debt also fell and German Bund futures reversed earlier gains, as sentiment towards riskier assets turned more favourable.
Greece set a smaller discount than expected in pricing buy backs of each of its 20 series of outstanding bonds. It set a spread of two percentage points - from a minimum of 30.2 to 38.1 percent and a maximum of 32.2 to 40.1 percent depending on the bond maturities.
"It indicates they really want the swap to succeed," Ricardo Barbieri, strategist at Mizuho said, referring to the pricing.
"Some investors might be tempted to participate in the swap because of the ability to simplify their position, should they wish to maintain exposure to Greece, otherwise (it's) an opportunity to exit completely their positions at a level that is better than Friday's close." Greek bond prices rose across the strip and ten-year Greek bonds yields fell 149 basis points to 14.68 percent.
Spanish 10-year yields were down 14 basis points at 5.20 percent and showed little reaction to Spain's formal request for the disbursement of 39.5 billion euros ($51.4 billion) of European funds to recapitalise its crippled banking sector.
Ten-year Italian borrowing costs shed 10 basis points to 4.39 percent, with the premium it offers over German counterparts falling below 300 basis points for the first time since March.
"(The Greek details) are better than expected. Therefore, periphery now getting a bid... and that's weighing on Bunds," one trader said.
German Bunds reversed gains to stand down 37 ticks on the day at 142.42 after the Greek news. They then came off the day's low after news of Spain's formal bank aid request.
The Greek bond buy-back is key to the efforts of its foreign lenders to make the country's debt burden more manageable, and its success would pave the way for the country for long-delayed funding to avoid bankruptcy.
But analysts wanted to reserve judgement on its long-term impact on the market until after they see the final demand, while many did not think it was a game-changer for Greece.
Investors must declare their interest by Dec. 7 and the expected settlement date is Dec. 17.
The pricing was "attractive enough" for those who wanted to get rid of their lingering positions in Greek sovereign debt, Athanasios Ladopoulos, partner and chief investment officer at Swi ss Investment Managers, a hedge fund, said. "I think it will be taken," Ladopoulos said. "Some people will find it the opportunity to take the ticket for the exit." But he also said it was more "kicking the can down the road."
Ben May, European economist at Capital Economics, said if the debt buy-back takes place successfully it would be a positive for Greece but w o uld not "mean that Greece has turned a corner."
"The bigger issue is that if we look at the long-run debt-to-GDP forecasts, that will only fall in line with what the Troika (of lenders) are projecting if the economic assumptions on which they are based prove to be correct. What we do know, in the past, is that the Troika's forecasts have tended to be very optimistic," referring the International Monetary Fund, the European Central Bank and the European Commission.
German Bunds were expected to remain sensitive to progress in U.S. budget talks, analysts said.
Treasury Secretary Timothy Geithner said on Sunday that he "can't promise" that the United States won't go over the "fiscal cliff" of tax increases and spending cuts that will be automatically triggered in early 2013, insisting it is up to congressional Republicans..
Without a deal, economists fear the U.S. economy could fall back into recession.
Investors will get the latest insight into the health of the world's largest economy through manufacturing data later in the day and jobs numbers on Friday.
Data on Friday are forecast to show employment growth slowed to 100,000 jobs last month from 171,000 in October, according to a Reuters poll of economists. U.S. manufacturing data this week is also likely to suggest a fourth-quarter slowdown is at hand.