German bonds dip on stocks, backdrop supportive

LONDON: German debt fell as a rebound in riskier equities inspired investors to cash in on recent bond market gains but uncertainty over a euro zone debt crisis should limit the downside for bonds.

Greece looked closer to securing funding and avoiding a default this week. ECB policymakers recently indicated they might accept a voluntary rollover of Greek debt and the International Monetary Fund said it was open to delaying Greece's repayment of its international loans.

But appetite for risk was limited by ongoing pessimism over the global economic recovery and uncertainty over whether the Greek government would manage to push through austerity reforms needed to secure a second international bailout.

"The Bund is awaiting details of a second bailout package for Greece," said Nick Stamenkovic at RIA Capital Markets.

Hints from the ECB that they would support a debt rollover suggested "a near-term solution at least in the funding crisis may be close to hand," he added.

EU officials are struggling to find a solution for Athens' financing needs for coming years which both avoids triggering a default and pushes some of the burden onto the private sector.

The Bund future fell 19 ticks to 125.25 as European shares rebounded from a 11-week closing low and US stock futures pointed to a higher open on Wall Street.

The bond market was at expensive levels and needed more impetus -- or negative news -- for 10-year yields to hold below the key 3 percent level, analysts said. The 10-year yield was up 2 basis points at 3.04 percent.

But a trader in London said investors may refrain from placing any big bets days before the European Central Bank's monetary policy meeting.

While the ECB is widely seen keeping interest rates at 1.25 percent, many expect it will signal an increase in July by saying it will eye inflation with "strong vigilance."

WHAT'S IN A WORD?

After ECB warnings against restructuring and reprofiling, soft or hard, it seemed that a rollover -- the latest buzz word -- was not entirely out of the question.

Senior ECB policymakers indicated last week that they might accept such a move, though it remains unclear what incentives might have to be offered to private investors to persuade them to take part in a rollover.

"You need to have a lawyer right next to your desk to evaluate all the terms that are being thrown out there by the politicians. A couple of weeks ago, reprofiling was the fashionable word," said a strategist at German bank in London.

The prospect of more funding for Greece eased the pressure on peripheral bonds pushing yields on two-year Greek bonds and Portuguese debt down to 22.92 percent and 11.24 percent respectively.

But the strategist said uncertainty should keep investors averse to risk and hungry for safe-haven German Bunds.

Firstly, there were questions about the composition of the bailout and how much private investors will be involved. Talk of a restructuring had also not gone away.

Rating agencies were also less accepting of that idea, warning on Monday they might classify such a move as default. Fitch went further, saying a debt exchange would be considered a default even if it were voluntary.

Copyright Reuters, 2011