* Bunds set for biggest weekly fall since late November
* Scope for further relief limited, capped by technical
* Greek talks progress buoys sentiment; Italy, Spain
By William James
LONDON, Jan 20 A second straight session
of steep losses left German Bund futures on track for their
biggest weekly fall in nearly two months as markets anticipated
Greece would strike a deal on debt writedowns.
Signs of progress in negotiations between Greece and its
creditors over how much of the country's crippling debt can be
written off looked to be edging towards a conclusion, easing the
likelihood of a disorderly default in March.
That prompted a shift out of safe havens, sending Bund
futures down by over a point to their lowest in two
weeks at 137.86 and helping Italian and Spanish and other
peripheral bonds to extend their recent outperformance.
"We've been building confidence in Greece and the IIF
(Institute of International Finance) arriving at some conclusion
over the last two sessions," said Peter Chatwell, rate
strategist at Credit Agricole in London.
The shift out of safe-havens and into riskier assets would
probably continue if a deal did materialise, but with the
success of a deal still dependent on successful implementation,
moves could be limited in size.
"We can't really go selling off Bund futures too hard and
getting too optimistic because there's still more twists and
turns yet for this tale to take," Chatwell said.
For an overview of the possible outcomes of the Greek debt
Bund futures should find technical support at the year's low
of 137.70 while the rise in cash market yields could be limited
by the psychological 2 percent barrier. Ten-year German bond
yields rose 7 bps on the day to 1.93 percent.
Even a smooth implementation of the debt swap would not
necessarily ease the outlook for Greece and see investors
abandon their heavy investment in low-return, but safe and
liquid German Bunds.
"We would argue the continued shrinkage of Greek GDP has the
potential to rapidly erode any advantage the state hopes to gain
from the proposed haircuts. As such, this could well be the
first rather than last restructuring effort," said Rabobank
strategist Richard McGuire.
Beyond Greece, lower-rated euro zone bonds outperformed
German debt. Italian 10-year yields were 9 basis
points lower on the day at 6.3 percent, extending their sharp
fall from levels above 7 percent seen two weeks ago.
Spanish yields also fell, reflecting the positive sentiment
prompted by the ECB's huge injection of cash into the banking
sector - some of which has been used to buy peripheral debt and
has helped support recent bond auctions.
Portuguese debt was steady on the day despite concerns that
the country could fall victim to contagion from any Greek deal.
Although Lisbon sealed a labour reform deal this week, some are
wary that Greek debt writedowns could be used as a template for
solving Portugal's debt problems.
The outperformance in peripheral debt could continue next
week, analysts said, in the absence of any long-term bond supply
pressure from the region's lower-rated states.
Germany and the Netherlands dominate next week's supply
schedule, with Italian sales of zero-coupon and inflation-linked
bonds providing the only peripheral debt for the market to