Bunds rally; Greece remains in focus

LONDON: German bonds rose on Thursday as a rout in commodities and stocks fueled safety bids, while Greek two-year yields hit fresh euro-era highs on growing belief a EU meeting next week will not deliver fresh aid for Athens.

Portuguese debt rallied, led by the short-end and dragging Irish bonds along, after Finland's Prime Minister-elect Jyrki Katainen secured agreement from the country's second biggest party for Lisbon's bailout package.

Yields for lower-rated peripheral bonds -- Ireland, Portugal and Spain -- tightened against those of German Bunds with Portugal leading the way. Two-year Portuguese bonds yielded 47 basis points lower on the day at 11.52 percent.

‘The Portuguese market has tightened with the Finnish looking set to approve the bailout package,’ Elizabeth Afseth, fixed income analyst at Evolution Securities said.

‘Concerns about growth and where commodity prices are going is the other factor,’ Afseth added.

Expectations for slower economic growth in China and Europe pressured commodity prices for most of Thursday, prompting investors to dump stocks and risky assets in favor of safer-haven assets.

German bonds were among the assets to benefit from such trades, with the Bund future seeing a settlement close of 124.30, up 37 ticks on the day.

It reached a session high of 124.49 earlier -- its highest intra-day level since the beginning of March.

Cash 10-year Bund yields were down 3 basis points at 3.114 percent while the two-year Schatz yielded 1.72 percent.

GREEK WOES

Germany piled the pressure on Greece, with Finance Minister Wolfgang Schaeuble saying any fresh aid to Athens would have to be tied to clear conditions. The yield on the Greek 2-year bond hit its highest level since the euro's launch at 26.52 percent earlier in the session.

Schaeuble said Germany would only decide on further Greek aid after inspectors from the International Monetary Fund and the European Union completed their reports on the country's compliance with the conditions of its bailout.

The comments consolidated expectations that no substantial agreement on Greece would emerge from a meeting of euro zone finance ministers next week, keeping uncertainty high over how long Greece can avoid a restructuring.

‘I don't think they are going to pull a rabbit out of the hat,’ said Vincent Chaigneau, global head of rate strategy at Societe Generale. ‘Probably they could agree on a rescue for Portugal, but I don't think anything substantial will come out for Greece ... The market is going to remain nervous.’

Comments by Finland's Social Democrats that they would look to ensure any further EU bailout would incorporate greater burden sharing between private investors and the region's taxpayers could also complicate the extension of additional aid to Greece, Rabobank strategist Richard McGuire said.

‘This stance, meanwhile, perhaps raises the odds we will see some form of term extension for Greek debt accompanying any further EFSF support,’ McGuire said.

‘For now, though, we continue to see term extension as a later rather than sooner event with an additional bailout likely to defer this outcome...The uncertainty besetting this outlook is, though, of course very high.’