* German bonds extend selloff, multiple factors cited
* Bund auction demand still seen solid as Spain risks remain
* Spanish yields stabilise, test of 7 pct seen likely
By William James
LONDON, June 13 German bond prices tumbled on
Wednesday, extending a steep fall seen the previous day, though
traders expected them eventually to rebound with markets still
fixated on Spain's elevated bond yields and Greek election
The pressure remains on Spain after a 100 billion euro bank
rescue plan sparked wider concerns over whether Spanish
government bonds would be pushed down the pecking order for
repayment by the new debt, and whether Madrid could continue
borrowing at affordable rates.
Bund futures fell to 141.54, 94 ticks lower versus
Tuesday's market settlement and adding to losses made in
Market participants cited a range of factors behind the fall
in Bunds that has seen 10-year German yields, which earlier this
month hit record lows as investors sought shelter in the euro
zone's least risky debt, rise nearly 20 basis points in under
two days to their highest since late May.
"There isn't a clear cut explanation... I would say there is
some profit taking and thinking that there may be a (policy)
reaction after the Greek elections," said Achilleas
Georgolopoulos, strategist at Lloyds Bank in London.
Greek elections on Sunday could hold the key to its future
in the euro zone. If parties opposed to the conditions of the
country's life-support bailout win power Greece may ultimately
leave the currency bloc, which could stir policymaker into
action to prevent contagion and may cool demand for safe-haven
An influx of highly-rated bond supply from Austria, the
Netherlands and the euro zone's EFSF rescue fund this week has
offered higher-yielding alternatives to Bunds. A 10-year German
debt sale later in the day also generated some pre-auction
selling as dealer made room for the new bonds, analysts said.
Traders also pointed to changes in Danish pension fund rules
as an additional technical factor reducing demand for
longer-dated German debt.
Some said the rising cost of shoring up the euro zone was
having a negative impact on Germany's creditworthiness. German
bonds have suffered more heavily than
higher-yielding U.S. debt in the past two session, narrowing the
10-year yield gap by 15 bps to 17 bps - its narrowest since
However, 10-year German bond yields remain at an extremely
low 1.47 percent. The 5 billion euro bond sale due after 0930
GMT was not expected to be short of bidders looking for a
low-risk and liquid asset.
"While Germany's creditworthiness is certainly increasingly
affected by further bailouts for the periphery, we do not
subscribe to another 'failed' auction and firmly re-iterate our
view that Bunds still belong to the safest and most liquid
assets globally," Commerzbank strategists said in a note.
SPAIN STEADY, FOR NOW
In early trade on Wednesday 10-year Spanish bond yields were
slightly lower at 6.69 percent, around 17 bps below Tuesday's
However, after hitting euro-era highs of 6.86 percent on
Tuesday yields were seen rising further to test the 7 percent
level - viewed by many as the point at which borrowing from
capital markets becomes unaffordable in the long term.
"Above 7 percent and it gets very messy for Spain," a second
Italy, seen as the next euro zone country in the market's
sights after Spain, was also in focus before debt sales on
Thursday, at which the sovereign was expected to pay a high
Italian yields eased 7.5 bps to 6.09 percent
on Wednesday, but have risen more 30 basis points this week as
worries about Spain have escalated.