March 22, 2013 / 8:56 AM / 5 years ago

EURO GOVT-German Bunds advance on Cyprus crisis

* Cyprus' funding crisis raises spectre of euro exit
    * Safe-haven German debt seen underpinned into the weekend
    * ECB safety net seen containing contagion to periphery
    * Spain outperforms Italy after Madrid's robust bond sale

    By Emelia Sithole-Matarise
    LONDON, March 22 (Reuters) - German bond prices pushed
higher on Friday as Cyprus scrambled to find a solution to a
funding crisis that could lead to the island becoming the first
euro zone state to exit the currency bloc.
    The European Union has given Cyprus until Monday to raise
the 5.8 billion euros needed to secure a 10 billion euro
international lifeline or face the collapse of its financial
    The Cypriot parliament was due to debate crisis measures in
parliament on Friday, but they looked insufficient to raise the
required funds for the bailout, without which the European
Central Bank has said it would stop emergency funding to the
island's banks.
    Talks in Moscow on a funding lifeline from Russia also ended
without result. 
    Although many in the market expect a last-minute solution 
to avert a euro exit, the uncertainty is feeding demand for
safe-haven German debt going into the weekend, pinning 10-year
yields at 2013 lows around 1.34 percent.
    "They (EU) are pushing for a solution to come over the
weekend but we still have the risk that the situation can get
out of control especially in terms of the banking sector. That's
why we have pressure for lower core yields," said Alessandro
Giansanti, a rate strategist at ING.
    German 10-year yields were last 3 basis points
down at 1.346 percent while the 30-year bond yield 
was 6.5 bps lower at 2.196 percent, its lowest since late
December. Bund futures were last 24 ticks up on the day
at 144.70.
    "Yesterday we started off with people thinking there was
going to be some sort of solution. Obviously those hopes faded
over the course of the day," a trader said.
    "We're remaining constructive on Bunds. We still think 1.25
(percent in 10-year German yield) is a viable target for the
market. The market is fairly well underpinned at the moment."
    A belief that the ECB's safety net will keep Cypriot
contagion from spreading to other peripheral euro zone countries
kept a lid on Spanish and Italian yields.
    Spanish 10-year yields were last 9 bps down on
the day at 4.90 percent, with investors heartened by the
country's successful bond sale on Thursday, which showed little
sign of fallout from Cyprus' problems. Equivalent Italian yields
 were 6 bps lower at 4.59 percent.

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