* German bonds rise on talk of ECB monetary easing next week
* Markets uncertain about EFSF's ability to raise cash
* ECB seen intervening to cap rise in Italian bond yields
By Ana Nicolaci da Costa
LONDON, Nov 30 German government bonds
rallied across maturities led by the short-end of the curve as
talk that the European Central Bank would ease monetary policy
next week pushed yields sharply lower across the curve.
German bonds had already been underpinned in early trade and
the European Central Bank intervened to cap a rise in Italian
and Spanish bond yields on scepticism that an agreement on
boosting the firepower of the euro zone rescue fund would be
enough to draw a line under the euro zone debt crisis.
The ECB will cut interest rates next week and throw more
funding lifelines to stressed banks toiling against the euro
crisis, according to a firm majority of economists polled by
Reuters this week.
"There's a rumour that the ECB are going to do some massive
liquidity provision at the short end which is why short-dated
Bunds have even gone negative in the one-year," a trader
"People like (ECB governing council member Christian) Noyer
has been talking about sharp downturn and the growth outlook so
they'll probably use that as an excuse to flood the market with
liquidity and try to solve a lot of these problems."
German two-year government bond yields slumped
12.5 basis points to 0.32 percent, while five-year German
government bond yields eased 15 basis points to
Ten-year German governmen bond yields shed 8.6
basis points to 2.2 percent pushing German Bund futures
more than 100 ticks higher to a session high of 134.50.
"8 IS THE NEW 7"
Euro zone ministers agreed detailed plans to leverage the
European Financial Stability Mechanism (EFSF) on Tuesday, but
could not say by how much because of rapidly worsening market
conditions, prompting them to look to the IMF.
Uncertainty remained over whether the EFSF would be able to
attract private sector interest and on how the potential
involvement of the IMF would be carried out.
"There were few surprises as far as the details about the
EFSF leveraging are concerned (and there was an)official
confirmation that the leveraging idea might run into practical
limitations ... and that investor appetite is not yet ensured,"
Rainer Guntermann, strategist at Commerzbank said.
"It's still a bit unclear how this coordination with the IMF
will look like, whether it will work."
Yields on Italian and Spanish debt edged back towards
unsustainable levels, with the 10-year Italian yield
rising 7 basis points to 7.36 percent.
The two-year yield was up 3.7 basis pouints at
7.25 percent but off the day's high at 7.59 percent earlier,
with dealers saying the ECB had bought small amounts of Italian
and Spanish bonds, targeting short maturities.
The direction of Italian yields from here depended largely
on ECB intervention, said Lynn Graham-Taylor, strategist at
"They have already let it go to 7.5 (percent) ... it gets to
silly levels if they don't stop it at 8, so perhaps a line in
the sand at 8?"
"I think 8 is the new 7," he added. "Fundamentally Italy can
obviously fund itself for a short-time at these sort of yield
levels. It's so clearly unsustainable, it's really just a
waiting game until something happens."
Spanish 10-year government bond yields were
little changed at 6.46 percent.
Against this backdrop, the pressure remains on the European
Central Bank to buy bonds more aggressively and on politicians
to agree on steps towards a fiscal integration.
Berlin and Paris aim to outline proposals for closer fiscal
integration before an EU summit on Dec. 9 that is increasingly
seen by investors as a last chance to avert a breakdown of the
single currency area.
"You need a significant break in this pattern of
ever increasing yields, sometimes tempered by promises and
solutions put forward by politicians which never quite get
there," Gary Jenkins, head of fixed income research at Evolution
"I think that the ultimate (response) would be a
proper move towards fiscal union with common European bond
issuance and at the same time while that's being done the ECB
scrapping its temporary and limited support and actually
invoking more of a QE (quantitative easing) approach."
He said large institutions were more concerned now with
capital preservation than actual trading, and that German Bunds,
UK gilts and U.S. Treasuries were still the safest bets but all
of them were now subject to risks.