* Risk appetite recovers, Bunds dip, but tension remain high
* Bunds underpinned by uncertainty over Cyprus bailout
* Spain, Italy rebound as some keep faith in ECB backstop
By William James
LONDON, March 20 Fresh uncertainty over Cyprus's
future in the euro zone kept German Bund yields near their
lowest levels of the year on Wednesday after the country's
parliament rejected a bailout plan that involved a bank levy.
While German Bund futures, sought as a safe haven
in times of market stress, were 20 ticks lower on the day at
144.42, they remained at elevated levels and few expected prices
to fall much further in the near term.
A 36-0 parliamentary vote against plans to partially fund a
bailout for Cyprus with a deposit levy left policymakers
scrambling to find another solution, keeping investors in
"Their options are pretty limited. Either they reach some
compromise on a deposit levy and/or they get some help from
Russia," said Nick Stamenkovic, strategist at RIA Capital
Markets in Edinburgh.
Cypriot Finance Minister Michael Sarris was in Moscow for
talks with Russian officials about a 5 billion euro loan and an
easing of the terms on existing arrangements.
"Clearly it's a very murky situation, so that should keep
core government bonds underpinned for the near term,"
Ten-year German bond yields were 1 basis point
higher on the day at 1.36 percent, but still 9 bps lower on the
week and within sight of Tuesday's 2013 low of 1.34 percent.
The precarious position of Cyprus's banks, which are heavily
dependent on European Central Bank support, has led policymakers
to urge rapid progress on a new solution. Without a solution,
Cyprus risks default as early as June, when a 1.4 billion euro
Cypriot banks stayed shut on Wednesday and party leaders
were holding crisis talks to explore a way forward.
The chaos in Cyprus has already caused investors to back
away from bonds issued by the region's other struggling
countries, and recent upward pressure on Spanish and Italian
bond yields was expected to resume.
"The risk is that we see more serious contagion... we're
sticking to our long Bunds, short periphery positions," a trader
said, referring to bets that the yield gap between German and
weaker bonds would widen.
Despite the expectation of more pressure, a strong open on
equity markets and expectations that European Central Bank
safety measure would limit contagion helped keep Italian and
Spanish yields in check.
The 10-year Italian yielded 4.67 percent, down
4 basis points on the day, while the Spanish equivalent yield
was 2 bps down at 5.03 percent.
"On the long term I would say all the widening we have seen
in Italy and Spain are opportunities to play for another spread
compression," said BNP Paribas strategist Patrick Jacq.
"But, having said that, it's clear that the very near-term
environment remains risky enough not to enter these kind of
The short-term risks were expected to support a 4 billion
euro sale of 10-year German debt due later in the session.