EURO GOVT-Bond markets cautious on Cyprus, Italy worries

Tue Apr 2, 2013 3:40am EDT

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* Bond markets stuck in cautious mood after Cyprus bailout

* Peripheral yields steady, but seen rising in coming week

* Charts point to fresh rise for safe-haven Bund futures

By William James

LONDON, April 2 (Reuters) - Euro zone bond markets began the week in cautious mood with peripheral bond yields holding at elevated levels as the impact of Cyprus's landmark bailout and Italy's political stalemate unnerved investors.

Cyprus detailed losses over the weekend of around 60 percent for savers of more than 100,000 euros as part of a bailout agreed just over a week ago. The deal was the first in euro zone history to make bank depositors share the burden.

Despite attempts to stress that Cyprus was unique, for investors the focus is on whether a similar model may be applied to any future bailouts elsewhere in the euro zone.

"Risk-off is still dominating," said Michael Leister, strategist at Commerzbank in London. "Whenever we talk in the future about bank aid or bailout we will have these loss estimations there."

Although Cyprus's banks reopened in orderly fashion on Thursday, allaying fears of long queues to withdraw cash, markets are still wary that the precedent set by the bailout could spur withdrawals from banks in Spain and Italy and destabilise an already-weakened banking system.

Bonds issued by the euro zone's lower rated issuers, such as Spain and Italy, were broadly steady in early trading, although yields were expected to rise in the coming days, adding to a steady climb over the last two weeks.

Italian 10-year yields were down 1 basis point on the day at 4.73 percent while equivalent Spanish yields were down by the same amount at 5.05 percent.

Italian yields have risen 21 bps since March 22, due also to its struggle to form a government after elections in February which failed to produce a clear winner.

Italy's president acknowledged on Saturday that he had limited scope to force divided political parties to find a solution, but ruled out standing down early to make way for new parliamentary elections.

BUNDS STEADY

Demand for the safety and liquidity of German Bunds kept futures contracts steady at 145.45, down 4 ticks on the day but within sight of near four-month highs at 145.87 set on Thursday before the Easter break.

Bunds were also supported by data released when European markets were closed on Monday, which showed U.S. manufacturing slowed in March, denting optimism about global growth and boosting the appeal of low-risk bonds.

Analysis of price moves from Thursday pointed to fresh gains, according to UBS.

"This maintains the pattern of higher highs/higher lows and with the MACD (moving average convergence-divergence) above zero and the momentum indicators rising strongly, the expectation is still for limited corrections and further price strength," said UBS technical analyst Richard Adcock.

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