* Bund yields retreat after hitting 2 percent; trade choppy
* Greek debt swap deal talks suffer setback but no panic
* Euro zone PMIs better than expected
By Kirsten Donovan and Marius Zaharia
LONDON, Jan 24 Bund yields see-sawed
either side of the psychological 2 percent level on Tuesday, but
there was no sense of panic after another setback in
negotiations on a Greek debt swap deal which is vital to
avoiding a chaotic default.
Better than expected euro zone manufacturing data eased
fears of a looming recession and pushed yields to a one-month
high of 2.019 percent early in the session. Traders said some
investors then booked profits on their short positions.
Greece's private creditors pleaded with European officials
who rejected their bond swap offer the previous day to hammer
together a deal before Athens tumbles into a messy default
The country is desperate for a deal to ensure funds from a
130 billion euro rescue plan drawn up by European partners and
the International Monetary Fund arrive before 14.5 billion euros
of bond redemptions fall due in March.
But markets believe the risk of a euro zone break-up if
Greece defaults in a disorderly fashion would be a scenario
scary enough for both parties to eventually reach a deal.
"People have been looking through rose-tinted glasses
although the equity market seems to have woken up today to the
fact there may not be an agreement," said Nick Stamenkovic, rate
strategist at RIA Capital Markets.
"Investors are giving the benefit of the doubt though
because the participants are all aware of the consequences if
there isn't an agreement."
The International Monetary Fund warned that the escalating
euro zone debt crisis is dragging down the world economy,
sharply cutting its outlook for growth.
Bund futures settled 14 ticks lower at 137.30.
Benchmark ten-year yields were 2 basis points
lower at exactly 2.0 percent.
"There's been good two way flows in a range of markets
today," a trader said.
"The back-end of last week and this week, the aggressive
short positions in risk assets have been pared back but that in
a way makes it more dangerous if there is more bad news."
European equities were half a percent lower.
The next three weeks are crucial, with Greece aiming to
submit a final offer by Feb. 13 and allow time for the paperwork
to be done. The closer that deadline gets, the more nervous
markets are likely to be.
"Arguing over minor details, really, seems to ignore the
bigger picture," Monument Securities strategist Marc Ostwald
said. "There will come a point where there will be cut-offs"
"It seems difficult to envisage a situation in which a hard
default would not result in Greece's exit from the euro zone and
then you start chasing down other countries."
AN IMMATERIAL WORLD
Even if the debt swap is successful, the euro zone will
still be marred by uncertainty and volatility will prevail as
many other problems remain unsolved.
Concerns remain over Italy's massive debt redemptions in the
first quarter, fiscal deficits in southern states continue to
widen as there is no growth, and the ambitious project for
greater fiscal integration is still in its inception phase.
Moreover, Greece is off track with its reforms and looks
unlikely to regain market access unless its debt pile falls
considerably more than the debt swap is aiming for, implying
public institutions such as the European Central Bank may have
to accept losses on their Greek bond holdings as well.
"The whole discussion (over Greece) seems to be highly
academic. The truth of the matter is that if Greece is paying 5,
3.5 or 2 percent on the new bonds is a little bit immaterial
because the debt is still unsustainable," Ostwald said.
For now there is a relative sense of calm. Yields for Italy
and other borrowers have come down since banks were given nearly
half-a-trillion euros of cheap loans in December, while the
International Monetary Fund plans to boost its resources.