EURO GOVT-Greek relief dampens Italy, Spain bond yields

Tue Dec 4, 2012 7:46am EST

Related Topics

* Greek buy-back seen successful, eases IMF aid doubts
    * Spain, Italy bonds yields seen subdued into year-end
    * Bunds steady on U.S. budget concerns


    By Emelia Sithole-Matarise
    LONDON, Dec 4 (Reuters) - Italian and Spanish bonds edged up
on Tuesday, with relief that Greece could be on its way to
clinching its next aid tranche expected to underpin demand for
higher-yielding euro zone debt into year-end.
    Although peripheral bonds outperformed Bunds, German debt
clawed back some ground on signs U.S. lawmakers could be headed
for an impasse in budget talks that could push the world's
biggest economy into recession. 
    Italian 10-year yields fell 4 basis points to
4.41 percent while the Spanish equivalent was last 2 bps lower
at 5.22 percent, extending Monday's falls after
Greece unveiled better than expected terms for a debt buy-back
crucial for it to get bailout funds in coming weeks.
    The repurchase plan is part of a deal reached last week by
Greece's international lenders to cut its debt pile, and it
needs to be completed before the IMF can release its share of
the aid.
    The buy-back terms improved the chance of success, prompting
investors to keep piling into lower-rated euro zone bonds.
Italy's borrowing costs fell to fresh 2-year lows and its
10-year yield premium over Bunds dropped below 300 bps for the
first time since March.
    "We think that the big items such as an imminent bankruptcy
in Greece are off the table. The overall climate is in favour of
investors looking for yield everywhere and so the way of least
resistance is for a narrowing of yield spreads," Piet Lammens, a
strategist at KBC said.
    
    CHANGING MINDSET?
    With debt issuance petering out as 2012 draws to a close and
Spain expected to eventually request aid that would trigger
European Central Bank (ECB) bond buying, Lammens expected
Spanish yields in particular to fall below 5 percent by the end
of the year.
    Technical charts pointed too to further falls after the
10-year yield broke last week below the 5.30 percent level that
had held over the past two months, which could likely see it
fall to 4.85 percent if 5 percent is convincingly breached.
    "People are underinvested with their cash and with Europe
looking a lot more stable that makes a fundamental difference in
terms of people's mindsets," a trader said. 
    "To be underinvested in high-yielding periphery costs you
money. So I see more and more momentum going into year-end for
the risk rally to continue."
    Greek bonds were slightly lower in price 
after Monday's sharp rally with details of the bond buyback due
at the end of the week.
    
    German Bund futures were last seven ticks up on the
day at 142.58 in choppy trading while cash 10-year yields
 were up half a basis point at 1.41 percent, well
within their recent 1.30-1.70 percent trading range.
    Traders saw little scope for the yields to break the top of
that range given concern over U.S. congressional gridlock over
budget talks.
    Investors were doubtful that U.S. lawmakers will reach a
deal in time to avert recession-inducing fiscal tightening in
the world's biggest economy early next year after the White
House dismissed proposals by Republicans for steep spending
cuts. 
    "The fiscal cliff debate rumbles on... The growth
implications if they don't get something sorted out are fairly
severe and as long as that remains in play, core markets remain
reasonably well supported," another trader said.
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