Bunds up on fears of Greek default, banking crisis

LONDON: German Bund futures rallied on Tuesday, extending the previous day's gains as a meeting of euro zone finance ministers stoked fears over a default by Greece and the scale of the impact on Europe's banks and economy.

They delayed a vital aid payment to Athens until mid-November and are consider making banks take bigger losses on Greek debt, raising concerns that for every step forward, euro zone ministers were taking two steps back.

The prospect of more painful negotiations, along with a collapse of shares in Franco-Belgian banking group Dexia, sent investors running for the safe haven of core European bonds.

The German Bund future jumped as European stocks fell more than 2 percent. Analysts said ten-year German government bond yields could retest record lows.

"They seem to be going backwards," Nick Stamenkovic, bond strategist at RIA Capital Markets said.

"If they are having problems getting the sixth tranche of funding, what's going to happen to the seventh tranche of funding in three months time. The situation is going to be even worse then. So Greece is on the brink."

The German Bund future rallied 67 ticks to 138.11.

Richard Adcock, technical analyst at UBS said a close above 138.10 was the next bullish trigger, opening the door first to a record high of 139.19 hit in September and then to 140.81.

German government bond yields fell across maturities, with the benchmark 10-year bond yield down 7.1 basis points at 1.74 percent. It hit a record low of 1.637 percent also in September.

European shares fell heavily, with banks lower on worries that an eventual Greek default will spark a banking crisis. Shares in Dexia plunged 23 percent, hit by concerns over its exposure to Greece.

The cost of insuring Belgium's debt jumped, with the 5-year credit default swap rising 14 bps on the day to 286 bps, and the French equivalent surging 9 bps to 198 bps, according to Markit data.

German 5-year CDS rose to another record high on Tuesday at 122 bps, up 6 bps on the day, on growing worries the euro zone's largest economy will pay a high price for a deepening euro zone debt crisis. It has risen 56 percent since Sept. 2 when the German CDS stood at 78 bps.

"Whilst it is obvious that Greece needs a bigger haircut to give them a chance to get their fiscal position back on a sustainable path it is going to be challenging to persuade the banks to take a bigger hit at this stage when they are already under such pressure," Gary Jenkins, head of fixed income research at Evolution Securities said in a research note.

Copyright Reuters, 2011