Bunds Rise with Periphery Still Under Fire

By Kirsten Donovan

LONDON, Nov 30 (Reuters) – Spanish and Italian government bond yields hit euro lifetime highs on Tuesday, hammered by concerns about the euro zone's debt crisis, after an 85 billion Irish rescue deal failed to stop the rot in peripheral bonds.

With the market focused on which peripheral country may be next to seek help, Spanish and Italian bonds continued Monday's sell-off, which saw 10-year yields post their biggest daily rises in more than a decade.

"It's very worrying because Spain is almost too big to be bailed out … whereas Italy is too big to be bailed out," said Everett Brown, European bond strategist at IDEAglobal.

"There's not much more that officials could do at the moment, so if spreads keep widening, it raises the small risk of the euro zone breaking down. After the past few years we can't rule anything out … It's a bit ominous."

Italian 10-year yields rose to close to 5 percent, while Spanish 10-year bonds yielded 5.7 percent, pushing the spread over Bunds above 310 basis points.

"This is testament to damage that has been done to the confidence in the (euro zone) project as a whole and if anything suggests that a more comprehensive solution is the only real answer at this stage," Lloyds TSB strategists said in a note.

Portuguese 10-year yields rose to 7.3 percent, reinforcing a widely-held view Lisbon will be unable to avoid tapping European Union/International Monetary Fund rescue funds.

Sentiment towards the periphery will be tested when Portugal sells treasury Bills on Wednesday and Spain sells up to 2.75 billion euros of 3-year bonds on Thursday.

The yield on the Spanish paper has risen around 65 percent during November to around 4.25 percent.

"Those investors who have funded Spain on a long-term basis still have a high confidence in the country successfully tackling its deficit problem," UniCredit MIB rate strategist Kornelius Purps said, adding he expected moderate demand.

"Probably there are a couple of investors out there who are no longer willing to finance this situation."

BUNDS STRUGGLE

December Bund futures were 60 ticks higher at 127.67, lifting off their lowest levels since May.

Safe-haven bids for Bunds have been limited in recent weeks with the prospect of further expensive bailouts set to increase the burden on Berlin. The cost of insuring against a German default rose 6 bps to a price of 57,000 euros per 10 million euros of exposure, according to 5-year credit default swap prices from monitor Markit.

"It's all eyes on the European Central Bank now," a trader said. "But they're not giving any indication they're going to help out. Buying Spanish and Italian debt is one of the few cards they've got left."

Two-year German bond yields were down 5.5 basis points at 0.864 percent, with 10-year yields down 6 bps at 2.636 percent.

The 2/10-year German curve has steepened around 35 bps in November as longer-dated yields have risen and shorter-dated yields have scaled back expectations of a normalisation in ECB liquidity supply.

The premium investors demand to hold core French bonds also widened to its most since April 2009 and the Belgian 10-year yield spread rose close to euro lifetime highs.

Both U.S. Treasuries and UK Gilts have benefited from safe-haven flows out of the euro zone, outperforming Bunds since the middle of November.

————–MARKET SNAPSHOT AT 0921 GMT —————— Futures continuous contract basis Current levels versus prior European close
FUTURES CASH YIELD THREE MONTH EURO 98.950 (+0.005) 0.449 (+0.001) TWO-YEAR SCHATZ 109.260 (+0.105) 0.860 (-0.057) 10-YEAR BUND 127.690 (+0.620) 2.694 (-0.052) 30-YEAR BUND 3.188 (-0.064)

2/10 YIELD CURVE SPREAD 1.834 (+0.005) 10/30 YIELD CURVE SPREAD 0.494 (-0.011)

2-YR SWAP RATE (BID) 1.576 (-0.027) 10-YR SWAP RATE (BID) 3.082 (-0.026) 30-YR SWAP RATE (BID) 3.227 (-0.038) 2/10 SWAP CURVE SPREAD 1.506 (+0.001) 10/30 SWAP CURVE SPREAD 0.145 (-0.012) 2- YR BUND/SWAP SPREAD 0.716 (+0.030) 10-YR BUND/SWAP SPREAD 0.388 (+0.026)

BREAKEVEN RATE (OATei 07/20) 1.877 (+0.007)

10-YR BUND/UST SPREAD 0.094 (+0.014) 10-YR BUND/OAT SPREAD 0.543 (+0.069) 10YR BUND/BONO SPREAD 3.059 (+0.301) 10-YR BUND/BTP SPREAD 2.110 (+0.175) 10-YR BUND/GGB SPREAD 8.831 (+0.152)

10-YR ITALIAN BTP FUTURE 110.150 (-1.170)

EURO STERLING DOLLAR OVERNIGHT LIBOR 0.38875 0.55313 0.23250 ONE-WEEK LIBOR 0.53875 0.55938 0.25203 ONE-MONTH LIBOR 0.75125 0.57625 0.25750 THREE-MONTH LIBOR 0.96750 0.73875 0.29594 3/MTH LIBOR/OIS SPREAD
29.05000 (-0.026) 24.27500 (-0.001) 11.79400 (+0.007) 

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