May 16, 2011 / 11:53 AM / 9 years ago

EURO GOVT-Greek debt to remain pressured after EU meeting

* Markets expect little progress on Greece at Eurogroup

* Portugal aid package to be approved, any rally seen brief

* Bunds seen bought on dips; DSK arrest feeds risk aversion

By Marius Zaharia

LONDON, May 16 (Reuters) - Greek bond yields rose further on Monday, with euro zone finance ministers seen increasing pressure on Athens to meet its fiscal goals at a meeting later in the day, while not committing to further financial aid.

Portugal’s bonds could gain support from expected approval of the country’s 78 billion euro, three-year bailout package, although some in the market may be disappointed not to see more favourable loan terms than those set for Greece and Ireland, as suggested by some EU leaders in March.

Any rally in Portuguese bonds is seen to be short-lived given lingering speculation that Greece may have to restructure its debt and new uncertainty about the handling of the crisis after the arrest of IMF chief Dominique Strauss-Kahn.

“I imagine it would be a short-term rally for Portugal ... but only of 20-30 basis points,” said ING strategist Alessandro Giansanti.

“Until the restructuring situation with Greece is solved and we see good macroeconomic data in Portugal, anything will be short-lived. I don’t think this meeting will come up with a defined plan for the situation in Greece.”

If a commitment for more aid to Greece emerged from the meeting, Greek bonds could rally in the short term, but it would not take long before the restructuring theme came back to haunt peripheral debt markets, analysts said.

“The market is pretty much convinced Greece needs debt restructuring anyway ... I don’t think markets will give up on this perception,” said Thomas Meissner, head of fixed income market research at DZ Bank.

“What the EU can provide right now is liquidity support, but not the solution to the problems Greece faces.”

Greek two-year bond yields GR2YT=TWEB were up 10 bps on the day to 25.66 bps, close to euro lifetime highs hit last week above 26 percent. Volumes remained extremely thin, with bid/ask spreads at 336 bps, three times the levels seen in early March.


The question of whether Greece will have to restructure its debt soon or can obtain further financial aid will probably be answered after an International Monetary Fund assessment of its debt figures in June. But uncertainties have been heightened by the weekend arrest of Strauss-Kahn, whose lawyers say he will deny charges of sexual assault. [ID:nN15241568] The IMF chief has played a pivotal role in brokering bailouts across Europe.

“He’s always been quite active in the bailouts that have gone on and maybe it doesn’t really help. The IMF is bigger than one man, but I’m sure the market will take it slightly negatively,” one trader said.

Other peripheral bonds were steady on Monday. Portuguese 10-year yield spreads over benchmark German Bunds were flat at 694 basis points, while five-year credit default swaps fell 23 bps on the day to 595 bps in anticipation of the aid approval.

EU leaders are also unlikely to discuss new bailout terms for Ireland, whose efforts to secure lower funding costs have been rebuffed because it has resisted German and French pressure to raise its corporate tax rate.

With risk aversion showing no sign of easing, Bund futures FGBLc1 were last 10 ticks higher at 124.52, after hitting an intra-session high at 124.62, with traders saying investors would continue to buy them on any dips.

Futurestechs technical analyst Clive Lambert said a break above Friday’s high of 124.63 will open the way to 125.10, a level not seen since early January. Support was seen at last week’s low of 123.58.

“If equity markets continue to see weakness we will inevitably attract a bid here, and our current ‘buy dips’ suggestion holds firm,” Lambert said.

Data showing euro zone inflation at 2.8 percent in April as expected was seen as confirmation the European Central Bank will continue to raise interest rates this year. But the rally in Bunds still had some room to go in the short run.

Commerzbank said the absence of U.S. debt supply this week may contribute to Bunds support and recommended tactical longs in June futures with a target of 125.55 and a stop at 123.80. (Editing by Ruth Pitchford and Susan Fenton)

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