Bunds fall, wait for policymakers to deliver

LONDON: German government bonds extended three weeks of losses on Monday as optimism grew that policymakers will soon deliver a promised comprehensive plan to solve the euro zone's debt crisis.

The Group of 20 major economies heaped pressure on euro zone leaders at the weekend, saying they expected an Oct. 23 European Union summit to decisively address the challenges through a comprehensive plan.

European equity markets rose to 10-week highs , and the euro held around 1-month highs as leaders said they were coming closer to agreement on critical elements of a rescue package, including a recapitalisation of the region's banks.

However, it was not all plain sailing, with resistance from the US and others to increasing the IMF's war chest and growing signs that Athens' creditor banks will fight any attempt to make them shoulder a bigger burden in restructuring Greece's debts.

"History says there's a capacity for these things not to disappoint initially, but for it to become problematic from the time of an announcement until there is concrete progress," said Nomura rate strategist Sean Maloney.

"There needs to be an indication they'll be quick to implement things."

December Bund futures were 33 ticks lower at 133.07, after posting three straight weeks of losses which has seen benchmark 10-year cash yields rise almost half a percent to 2.24 percent.

"There seems to be tentative support from global leaders for a solution but a week to solve the crisis seems like a bit of a big ask, especially with banks unlikely to be keen on bigger Greek write-downs," a trader said.

"Long positions are being shaken out of the market but we're not seeing a big move to put on shorts and we're unlikely to totally collapse before we see details of any plan."

Germany and France are trying to put flesh on the bones of a crisis resolution strategy in time for the EU summit that will involve plans to recapitalise banks, make Greek's debt mountain more sustainable and ramp up the firepower of the bloc's rescue fund.

But although Bunds have sold off and equity markets have rallied, peripheral government bonds are not making much headway.

Italian 10-year yields although 4.5 basis points lower at 5.75 percent are back near their highest levels since the European Central Bank restarted its bond buying programme.

"A solution is more a positive for the global big picture than for Europe because depending on what they do with Greece, you may have the contagion risk," Nomura's Maloney said.

"The links here are a bit more complicated than just risk on/risk off."

Markets will find out later on Monday how much the European Central Bank spent on bond purchases -- which have been mainly focussed on Italian debt -- in the secondary market last week.

Data released last Monday showed a slowdown in pace, with the smallest amount since the buying programme was restarted in August. Buying reported after an Italian bond sale that weighed on markets last Thursday will not be reflected in this week's numbers.

German finance minister Wolfgang Schaeuble, who has called for a larger write-down of Greek debt speaks in London on Monday.

Copyright Reuters, 2011