LONDON: German Bund futures held steady on Tuesday, staying near highs hit the previous day as markets worried that Cyprus's bailout could be a template applicable to larger states that might get into difficulty.
The head of the Eurogroup of finance ministers, Jeroen Dijsselbloem, said on Monday that a Cypriot bailout, which wiped out some senior bank bondholders and will impose big losses on large depositors, was a new template for resolving euro zone banking problems.
He later appeared to backtrack, saying Cyprus was a specific case with exceptional challenges but analysts said the market was adjusting to the idea that investors and savers will be forced to contribute to future bank bailouts.
"He may have tried to tone down his comments but the impact has been pretty clear: risk markets have lost ground, the euro has lost ground and peripheral bonds have come under pressure," said Nick Stamenkovic, strategist at RIA Capital Markets.
"Hence, investors continue to demand core government bonds and Bunds look pretty well underpinned at the moment."
The tension supported demand for low-risk Bund futures , which were last 15 ticks lower on the day at 144.57, close to Monday's near three-week high.
LONG BANK HOLIDAY
Banks in Cyprus will stay shut until Thursday in a bid to stop savers emptying their accounts while the state works on a complex restructuring needed to secure 10 billion euros of bailout cash from international lenders.
The euro and bank shares and bonds took the brunt of the impact of Dijsselbloem's comments, but tight links between sovereigns and the financial sector, which buys a large portion of government bonds, meant there was some spillover to the euro zone's weaker states.
Spain, whose weak banking sector made it a particular concern, saw 10-year government bond yields rise steeply on Monday although early trades on Tuesday showed yields steady at 4.95 percent.
"To some extent it was an over-reaction yesterday afternoon, but clearly the market remains nervous in the near term," said BNP Paribas strategist Patrick Jacq. "I think that in coming days risk assessments will improve, and peripheral spreads will tighten slightly."
Analysts said the impact on peripheral debt was limited by the market's faith that the European Central Bank will buy the government bonds of states that need help and agree to certain conditions.
The promise to do so, made last July when tensions in the currency bloc were at their height, has helped lower Spanish and Italian borrowing costs and prevented subsequent shocks from causing investor panic.
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