February 17, 2012 / 9:30 AM / 8 years ago

EURO GOVT-Fresh Greek bailout deal hopes push Bunds lower

* Investors renew bets on a Greek bailout deal
    * Markets cautious due to risks of further accidents
    * Commerzbank recommends taking profits on peripheral rally

    By Marius Zaharia	
    LONDON, Feb 17 (Reuters) - German Bunds fell on Friday
on indications Greece will secure a long-delayed second bailout
next week, but the scope for further losses was limited in the
near term as the risk of a disorderly Greek default could not be
ruled out.	
    Lower-rated Italian and Spanish bonds gained, but some
analysts doubted the rally would continue for much longer given
the euro zone's persistent problems. Debt issued by Portugal,
seen by many as the next country that could be forced to
restructure its debt, underperformed.	
    Euro zone officials said on Thursday they were putting the
finishing touches to a Greek bailout deal for approval on
Monday. That would pave the way for Athens to finally proceed
with a bond swap whereby private creditors would give up some 70
percent of the value of their Greek bond holdings, reducing
Athens' 350 billion euro debt pile by about 100 billion euros.	
    The bailout money will be disbursed only after the debt
restructuring takes place. Some jitters remain due to a tight
schedule, with Greece needing to secure the funds before March
20, when it has to pay back debt worth 14.5 billion euros.	
    Even if Greece avoids a disorderly default in March, markets
are unlikely to jump on riskier assets with too much enthusiasm
due to concerns over the implementation of the bailout terms and
the solvency of other euro zone countries.	
    "It feels like things are a lot more positive than they were
yesterday morning, but given the history of this thing we're
waiting for a spanner to go in the works," one trader said. 	
    "The market is expecting ... a deal on Monday with the
window open for the PSI (private sector involvement). They can
announce the details of it but then we need to see things turn
up, it's not completely done yet." 	
    Bund futures were last 32 ticks lower on the day at
138.71. The trader said Bunds were unlikely to break below this
year's 137-140 range in the near term.	
    	
    UNCERTAINTY STILL HIGH	
    Bond prices were driven mainly by short-term investors and
further headline-driven volatility was likely until developments
in the euro zone debt crisis became easier to anticipate,
traders said.	
    Commerzbank strategist Rainer Guntermann said Bund yields
, last steady at 1.89 percent, could struggle to
break above the psychologically important 2 percent level in the
near term, and even if they did, they would not trade much above
it.	
    "Some implementation risks remain, the PSI detail would be
important and ... also the risk of PSI down the road (in other
countries)," Guntermann said. "There are still arguments for
yields to be capped on the upside."	
    Bund yields could rise above 2 percent if the rally in
peripheral bonds continued, he added, but at the same time he
recommended investors to use the renewed demand for such paper
as an opportunity to take profits on their long positions.	
    Short-term Italian and Spanish debt yields have more than
halved since the European Central Bank injected almost
half-a-trillion euros into the banking system in late December. 	
    Banks will be able to access more cheap three-year loans in
a second ECB operation at the end of this month. However,
analysts said that would not necessarily spur further gains in
peripheral bonds as the current rally may have been driven by
investors already positioning for a high take-up.	
    Lloyds strategists said a negative result at Monday's euro
zone finance ministers meeting was still possible and that an
additional delay to the Greek PSI deal would spark a selloff in
peripheral bonds and send Bund yields towards the Nov. 2011 lows
of 1.72 percent.
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