* Bunds hit contract high as growth concerns lend support
* Portugal seen at risk, auctions weigh on Spain, Italy
* New long-term Greek bonds have highest yield in euro zone
By William James
LONDON, March 12 Rising demand for German
debt showed no sign of easing on Monday in the aftermath of
Greece's huge debt restructuring while bonds issued by
peripheral states faced fresh pressure as the focus turned to a
weak economic outlook.
Bund futures hit a contract high of 138.95, up 47
ticks on the day, as investor attention turned to whether
fragile growth could derail debt-laden Portugal's progress and
reignite latent concerns about Spain and Italy.
Ten-year German yields hit a two-month low of
1.75 percent, down 5.5 bps on the day as demand for triple-A
rated debt remained high.
"Bunds don't want to lie down. We're now going to have a
look at Portugal and then Spain; we're moving on to bigger
growth concerns," a trader said.
On Friday, Greece took the final steps towards slicing
around 100 billion euros off its public debt, using legislation
to force remaining private creditors to swap their Greek debt
for new bonds worth considerably less.
The new Greek bonds started trading on Monday and remained
the highest-yielding long-term debt in the currency bloc -
highlighting scepticism that Greece's problems were over.
The bond exchange paves the way for Greece to receive the
bailout funding it needs to avoid a disorderly default. Euro
zone finance ministers were expected to sign off on the 130
billion euro package on Monday.
While this removed one source of risk from the market,
investors remained reluctant to buy into higher-yielding euro
Portuguese yields rose across the curve. Portugal is seen as
the next weakest link behind Greece and remained most vulnerable
to a fresh wave of selling in peripheral debt markets. The
10-year yield rose 12 basis points to 13.94
"Our view on fundamentals is nowhere near as bearish as the
market is... but we've got to concede that the market has quite
a lot of power here. If some sellers turn up then there doesn't
appear to be much to stop spreads from widening," said Peter
Chatwell, strategist at Credit Agricole in London.
Spanish 10-year yields rose 5.4 bps on the day
to 5.06 percent, while their Italian equivalent
was 8 bps higher at 4.92 percent.
Both countries will issue debt later this week and although
the sales were expected to pass off smoothly, they added to
upward pressure on yields.
Yields on core government debt have stayed close to record
lows all year, with the return on German 10-year bonds topping 2
percent for only one day.
"That's testimony to the underlying investor caution over
the medium-term Greek picture and the outlook for the global
economy," said Nick Stamenkovic, strategist at RIA Capital
Markets in Edinburgh.
NEW BONDS, SAME CONCERNS
Following the debt swap, Greece issued 20 new bonds
to its investors on Monday, with early pricing
showing bid yields between 18.77 percent on the shortest
duration debt maturing in 2023 and 13.4 percent
on the 2042.
The new 2023 bond carried a 470 bps yield premium over
comparable debt from Portugal.
Analysts said this reflected the investor view that Greece
faces an uphill struggle to meet the terms of its bailout and
was likely to need further debt restructuring.
Late on Friday, the International Swaps and Derivatives
Association concluded that the Greek debt swap constituted a
credit event and would trigger payment on credit default swap
(CDS) insurance contracts.
Latest data from the Depository Trust and Clearing
Corporation showed the maximum net CDS payout was $3.16 billion,
with the actual payout likely to be lower depending on the
outcome of an auction procedure scheduled for March 19.