LONDON: German Bunds rose sharply on Tuesday and other euro zone debt firmed as Japan faced a potential radiation castastrophe following Friday's devastating earthquake and tsunami, prompting investors to seek safe havens.
Outright debt yields fell across the euro zone but the yield gap between lower-rated sovereigns and and benchmark Bunds grew, signalling a flight to safety in response to the disaster in Japan, where a quake-crippled nuclear power plant exploded and sent low levels of radiation floating towards Tokyo.
Bund futures were last 111 ticks higher at 123.30, having hit an intra-day high of 123.69. Futurestechs analyst Clive Lambert said the market's next targets above the current level would be 123.48 and 124.46.
"Markets are extremely risk-averse, there are stop-losses on the way," one trader said. "It's a strong move, and it can go further."
Bund yields were last down 13.2 basis points at 3.093 percent, having hit their lowest since end-January at 3.089 percent earlier in the session.
A second trader said the possibility of Japanese repatriation of funds, many of which are invested in overseas government bonds, could later cap or reverse Bund gains.
Debt issued by euro zone's fringe states rallied on Monday after the bloc's leaders agreed to increase the lending capacity of the European Financial Stability Facility bailout fund and allow it to buy bonds on the primary market.
The package surprised investors who had expected the measures to be weaker, and to come at a later meeting at the end of the month. But analysts say the rally could be short-lived as the measures were still seen as not strong enough to get on top of the year-long sovereign debt crisis.
END-MONTH SUMMIT STILL KEY
Analysts say the key measure investors would like to see to sustain the rally in the periphery is the EFSF being allowed to intervene in secondary markets, but that was not a central scenario in the markets.
Investec chief economist Philip Shaw said markets will also be looking for technical details on how the bailout fund will be increased, with some still seeing a chance that Germany will back away from making more funds available for its less-disciplined peers.
"Markets need a degree of comfort ... and the 24/26th of March European summit will be critical," said Philip Shaw, chief economist at Investec.
Greek/German 10-year yield spreads were last at 951 basis points, 22 bps wider on the day, after falling more than 40 bps on Monday to levels close to those before this month's three-notch rating cut from Moody's.
Other peripheral spreads were also up to 10 bps wider on the day, while the cost of insuring Portuguese and Geek debt against default rose 15-21 bps, according to data from Markit.
"The move is mainly driven by the Bunds. The periphery is not in focus today," the first trader said.
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