November 4, 2011 / 4:36 PM / 8 years ago

EURO GOVT-Bunds rise on EFSF worries, Italy under pressure

* Merkel says few in G20 pledge to participate in EFSF

* Italian yields jump as Berlusconi refuses IMF aid

* Greek government confidence vote due late on Friday

By Neal Armstrong

LONDON, Nov 4 (Reuters) - German Bund futures rose on Friday as worries over a lack of commitment from G20 countries to participate in Europe’s bailout fund and heightened political tension in Italy forced investors towards perceived safer assets.

Italian two-year government bond yields jumped and the spread of Italian 10-year yields over Bunds hit a new lifetime high after Prime Minister Silvio Berlusconi said he had refused an offer of financial support from the International Monetary Fund.

Euro zone leaders agreed on Oct. 26 to scale up the EU bailout fund, the European Financial Stability Facility (EFSF), but gave no firm details of where the extra money would come from. German Chancellor Angela Merkel cast further doubt when speaking at a meeting of G20 leaders in Cannes.

“Merkel said hardly any countries in the G20 had said they would participate in the EFSF. To me the EFSF is starting to look dead on arrival,” a trader said.

The December Bund future was up 70 ticks on the day at 137.58, off an early low of 136.35 hit after riskier assets initially extended Thursday’s rally as Greece backtracked on plans to hold a referendum on its latest bailout package.

Cash 10-year Bund yields were down 7 basis points at 1.82 percent .

Berlusconi’s political future hung by a thread on Friday as he faced a rebellion by his own supporters.

Italy is seen as the next domino that could risk fall in the euro zone crisis, with yields on its 10-year bonds reaching 6.38 percent, close to the 7 percent threshold widely viewed as unsustainable.

“It looks like the ECB has been sniffing around Italian bonds today but there’s only so much they can do and I think if we go above the 6.50 percent level in 10-year Italian yields this could quite easily snowball,” said Eric Wand, rates strategist at Lloyds Banking Group.

ECB President Mario Draghi said on Thursday that the Bank’s Securities Markets Programme (SMP), which the ECB is using to intervene in bond markets of highly indebted euro zone countries, is temporary and limited in nature.

The Italian yield curve has flattened this week as the country bears the brunt of investor angst over the EU’s failure so far to draw a line under the 2-year-old crisis.

The gap between two- and 10-year Italian yields is at its slimmest in more than two years around 70 bps after short-dated bonds came under intense pressure this week, reflecting investors’ increased fears over the sustainability of Italy’s borrowing costs.

GREEK VOTE

Investors were still watching political developments in Greece after Finance Minister Evangelos Venizelos told senior European officials the country had ditched its plans to hold a referendum.

Riskier assets were cheered on Thursday when Greek Prime Minister George Papandreou agreed to step down and make way for a negotiated coalition government if his Socialists backed him in a confidence vote later on Friday, raising the prospect of a political consensus on the EU rescue deal.

Papandreou’s call for a referendum had thrown financial markets into turmoil and shocked policymakers as it was seen threatening a messy default on Greece’s massive debts.

“We need a clear direction in terms of what government will be formed in Greece and who is going to lead it,” said Orlando Green, strategist at Credit Agricole CIB.

Some traders said investors were cutting their exposure to risk before the Greek confidence vote, due to be taken after the European market closes.

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