* Greek bond yields volatile, seen rising further
* Investors increasingly pricing haircuts on Greek debt
* Italian auction well-bid after recent yield rise
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, April 28 Greek government bond yields
see-sawed within a wide range on Thursday but the upward trend
is expected to resume in coming days as investors become
increasingly convinced a debt restructuring is looming.
Market participants see a growing probability that a Greek
restructuring could happen this year or next. Among numerous
scenarios, investors may have to accept lower coupon payments, a
maturity extension, haircuts, or a combination of the above.
Against that backdrop, euro zone benchmark German bond
prices rose, with the Bund future jumping to its highest in more
than six weeks, helped too by data showing the U.S. economy grew
less than expected in the first quarter.
The uncertainty around a potential Greek debt restructuring
is leading investors to prepare for what is probably the worst
case scenario, painted by Standard & Poor's earlier this year --
a 50-70 percent haircut, traders said.
Greek two-year yields GR2YT=TWEB fluctuated between 24 and
27.1 percent, having risen 2 percentage points in the previous
session to 26.9 percent.
A bid/ask spread of 571 basis points -- its highest since
May 2010, when Greece was granted a bailout -- indicated volumes
were extremely low, exacerbating moves, but traders said the
bias was for yields to rise.
"We had a seller and a buyer this morning ... but I suspect
it's somebody buying them against the CDS, there's no outright
buyers at this stage because there're too many risks," one
trader said. "If you believe there's a restructuring around the
corner you wouldn't want to own these (bonds)."
Buying bonds against credit default swaps -- the negative
basis trade -- poses risks as well.
Senior derivatives users said the intrinsic value of CDS
could be severely hit if Greece restructured its debt without
triggering a credit event, according to IFR, a Thomson Reuters
news and market analysis service. [ID:nLDE73Q1TV]
The two-year bond GR2YT=TWEB, the worst hit since Germany
suggested Greece may have to restructure, trades at about 69
percent of its face value.
"A 50 percent haircut is now practically priced in for
maturities of five years and longer," ING rates strategist
Padhraic Garvey said.
"For two-year paper a yield of some 45 percent would be
required before a 50 percent haircut was priced there, which
makes the current valuation of 25 percent look relatively tame."
TOO FAR, TOO FAST
For a 60 percent haircut to be fully priced in, the two-year
bond's face value would need to drop to 40 percent, but such a
move was unlikely to be a first step, said Elisabeth Afseth,
fixed income analyst at Evolution Securities.
"A change in maturity is more likely ... so I suspect there
will be someone coming in who sees value in the two-year before
it reaches anything like under 40 in the price. The 50 on longer
maturities is an obvious psychological level for no other reason
than it's a nice round number."
Societe Generale strategists said given the uncertainty over
Greece, it remained attractive to underweight peripheral euro
zone government bond yield spreads.
"Beware though a bounce in the near term. Spreads have
widened out too much, too fast, in the case of Greece,"
strategist Chiaran O'Hagan said in a note.
Elsewhere, Italy sold 10.1 billion euros worth of three- and
ten-year fixed rate bonds and 2018 Euribor-linked bonds earlier
on Wednesday, in an auction which analysts said drew solid
demand after a recent yield rise.
Spanish and Italian bonds gave back their March gains over
the past two weeks, with investors eagle-eyed for any sign of
contagion from the Greek crisis.
But investors still had confidence the two countries could
avoid following the path of Greece, Ireland and Portugal and
that was shown by liquidity levels, traders said.
The Spanish bid/ask spread on the 10-year bond was 33 basis
points, compared with 380 bps for similar-dated Irish paper and
298 bps for the Portuguese equivalent -- its widest since
Bund futures FGBLc1 settled 68 ticks up on the day at
122.67, the highest since March 18, with traders saying stops
triggered at 122.54 also helped the move higher. The contract
broke through last week's high of 122.65, a level previously
signalled as offering technical resistance.
(Editing by Ruth Pitchford)