* Cyprus to top EU finance ministers' meeting
* Island's bailout costs seen higher than expected
* Italy, Spain yields edge up on profit-taking
By Emelia Sithole-Matarise
LONDON, April 12 German Bunds rose on Friday and
are expected to gain more in the coming sessions as investor
concern that Cyprus may need more bailout funds lifted demand
for low-risk debt.
Cyprus's rescue package will top an informal meeting of
European Union finance ministers starting later in the
Reuters obtained documents this week showing that the
Mediterranean island will have to contribute almost twice as
much as initially thought to its rescue package.
Adding to market edginess, Luxembourg Finance Minister Luc
Frieden said Europe and the International Monetary Fund could
not increase their 10 billion euro contribution to the Cyprus
bailout depite news the cost was going to be higher than
Cyprus and the European Union have agreed in principle how
it will provide its 13 billion euro contribution to the bailout
package, although that is almost twice the original figure due
to the country's sharp recession.
"This is a lot more onerous for Cyprus, and I don't think
they will get any concessions. They are talking about selling
gold reserves, about privatisation, increasing capital gains
taxes and all kinds of ways to raise the money," a trader said.
The Bund future was 55 ticks up on the day at
145.80, with German 10-year yields 4 basis points
down at 1.263 percent, leaving it just 6 basis points from
8-month lows hit last week.
Bunds, favoured by investors as a safe-haven in times of
market stress, were also seen supported by expectations that
U.S. retail sales numbers due later in the day could undershoot
forecasts after a recent rash of downbeat data.
"There are some short-term players who think the correction
in Bunds is over and that the (U.S.) retail sales this afternoon
will be weaker than expected. Also equities have done well but
at the end of the week there might be some temptation to take
profits there," said Piet Lammens, a strategist at KBC.
LOOKING TO JAPAN
In lower-rated euro zone bonds, Italian and Spanish bond
yields edged up as concerns over Cyprus prompted some in the
market to book profits in riskier assets, including equities,
after their recent rally.
Italian 10-year yields were 3 basis points up
on the day at 4.36 percent with Spanish equivalents
up 4 bps at 4.71 percent.
The rise in yields was, however, seen as limited in the
near-term by improved demand for riskier assets on the back of
Japan's huge stimulus plans and increased bets that the European
Central Bank will ease monetary policy in the coming months.
Questions over how much Japanese switching out of their
ultra low-yielding domestic debt into non-yen denominated assets
offering higher returns was tempering some of the euphoria that
drove the yields of top-rated euro zone issuers such as France
and Belgium to record lows this week.
"There's been no follow-through in terms of the flow out of
Japan so people are questioning now the impact the BOJ policy
may have so we are taking back a little bit of the hype out of
the market and we may see yields go up a bit," said Alessandro
Tentori, global head of rates strategy at Citi.
Although anticipation of flows from Japan into the currency
bloc also benefited lower-rated bonds, some analysts are
sceptical that they will actually switch from their domestic
bonds into riskier paper from the likes of heavily-indebted
Italy, struggling to form a government after February elections.
"When it comes to the banks and pension funds it's unlikely
that they will all of a sudden go into Spain and Italy. France
is likely to remain one of the favourites," Tentori said.