Greek yields up ahead of key govt confidence vote

LONDON: Yields on Greek and other lower-rated euro zone bonds rose on Monday, after ministers delayed granting emergency loans to Greece and with market tension increasing before a key parliament vote.

The Greek parliament holds a confidence vote on Prime Minister George Papandreou's new cabinet, formed to stiffen resolve behind austerity measures to win new loans and avoid bankruptcy.

Political backing for more painful reforms is key to secure vital new aid to plug a funding gap next month and a failure by Papandreou to win the vote will increase concerns about Greece's immediate financing situation.

"My most likely scenario is that Mr. Papandreou will pass the vote," said Glenn Marci, strategist at DZ Bank. "Anything else would rack financial markets. Sentiment is fragile and 127 for the Bund future would only be the start of a rally."

Bund futures were last up 7 ticks at 126.14. Ten-year Greek bond yields rose to 17.76 percent, increasing the risk premium on holding Greece's debt rather than benchmark German Bunds to 1,480 basis points. The premium hit its euro-era high of 1,600 bps late last week.

Landesbank Baden-Wurttemberg trader Charles Berry also said Bund futures would easily reach the 127 level if the government does not get backing from parliament, but warned there would be little relief if it survived the vote.

"Things won't change dramatically," Berry said. "The Greek people don't want to save money ... and political risk will remain."

DZ Bank's Marci said Greek yields could fall by 50-100 basis points in an immediate reaction to a positive outcome, but noted that swings of that size have occurred on a daily basis over the past few sessions and the move can easily reverse.

RESCUE FUNDS

With the focus mostly on Tuesday's vote, market reaction to a planned increase in guarantees for the EFSF bailout fund to 780 billion euros from 440 billion euros and that the European Stability Mechanism will not have preferred creditor status was largely muted.

News of increased powers for the EFSF fund have been a rallying point for Spanish and Italian paper, but traders said markets wanted to see the immediate threat of a Greek default avoided before cheering an enforcement of defence mechanisms.

"That's the worry: how far is this going to spread?" said Alan McQuaid, chief economist at Bloxham Stockbrokers.

The spreading impact of the region's debt crisis was evident in Moody's decision to place Italy's Aa2 rating on review for downgrade late on Friday. Moody's cited concerns over an increased cost of borrowing stemming from the Greek crisis, as well as structural impediments to growth.

The Italian and Spanish bond yield spreads over Bunds were each a touch wider at 190 bps and 264 bps respectively, off highs seen earlier in the session.

A Spanish auction of up to 3.25 billion euros of 3- and 6- month bills on Tuesday will be closely watched after last week's lacklustre bond tender triggered a sell-off of the country's paper due to contagion fears.

"The Spanish T-bill auction might ... turn out weaker than usual, as it happened with the Spanish bond auction last week," said Chiara Cremonesi, fixed income strategist at UniCredit.

"We expect the auction to register a rise in cost of funding at both maturities." A Greek T-bill auction is seen going smoothly, helped by demand from domestic banks which use government bonds as collateral to get funds from the European Central Bank.

Copyright Reuters, 2011