LONDON: German Bunds held steady on Thursday, with expectations Cyprus will come up with a plan to resolve the crisis over its proposed bailout making investors reluctant to increase allocations to low-risk assets.
But German yields stayed near their 2013 lows and were expected to hold close to those levels in the near term as uncertainty over the fate of Cyprus remained high.
The Mediterranean island was in talks with Russia over potential cooperation in the banking and energy sectors and over a loan aimed at avoiding a levy on bank deposits proposed by the European Union as part of a bailout.
Cyprus ordered banks to stay shut until next week to prevent a bank run. The European Central Bank said it would maintain its emergency liquidity assistance for Cypriot banks until March 25, which is now seen as a deadline for a plan to be agreed.
"First of all it can be doubted that Cyprus is systemically so relevant and secondly there are possible solutions, just that Cyprus is not yet willing to accept them," said Norbert Wuthe, rate strategist at Bayerische Landesbank.
"There will be a solution in the end."
He said the Cyprus situation was "a litmus test" of confidence in the ECB's as yet unused bond-buying programme and that the so far "tame market reaction contrasting the shockwaves from the media" showed the backstop was working.
Bund futures were last 8 ticks lower on the day at 144.22, while 10-year cash yields rose 0.7 basis points to 1.385 percent, having hit a 2013 low of 1.343 percent on Tuesday.
One trader said a range between 144.00 and this week's high of 144.82 should hold near-term. However, he warned against underestimating the seriousness of the situation, pointing to this week's gains in the Bund future of more than a full point.
"It feels the market wants to buy (Bunds after any dip in prices). Nobody wants to be caught short but they don't want to be caught too long either," the trader said.
"The market seems to be very nervous. Cyprus is indeed a small economy but when you see it managed to move the market that much it's a bit scary."
Other euro zone bonds were also steady. Spanish 10-year yields were 3 bps lower on the day at 4.97 percent, only a touch higher than before the Cypriot bailout plan was announced on Friday.
A Spanish auction of between 3 and 4 billion euros worth of 2015, 2018 and 2023 bonds later on Thursday was expected to go smoothly.
"We can be quite optimistic looking at the yield reaction of Spanish bonds from Friday evening," Bayerische Landesbank's Wuthe said.
Comments
Comments are closed for this article.