EURO GOVT-Cyprus bailout rejection keeps German debt in demand

LONDON, March 20 Wed Mar 20, 2013 3:11am EDT

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LONDON, March 20 (Reuters) - Fresh uncertainty over Cyprus's future in the euro zone kept German Bunds in demand at elevated levels on Wednesday after the country's parliament rejected a bailout plan that involved taxing savers.

Bund futures, used as a safe-haven in times of market stress, were 5 ticks lower at 144.57 but held relatively firm at the high price levels seen before a 36-0 vote by the Cypriot parliament to reject the bailout.

"Bunds remain well underpinned, it will continue to be a mess. The risk is that we see more serious contagion... we're sticking to our long Bunds, short periphery positions," a trader said.

The chaos in Cyprus has already caused investors to back away from bonds issued by the region's other struggling peripheral countries, and upward pressure on Spanish and Italian bond yields was expected to continue throughout the session.

Cypriot banks remain shut on Wednesday and party leaders were due to start a meeting at 0700 GMT to explore a way forward. The precarious position of the country's banks, which are heavily dependent on European Central Bank support, has led policymakers to urge rapid progress on a new solution.

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