S&P warning boosts Bunds, counters austerity relief

LONDON: German Bund futures rallied on Monday, snapping five days of losses, while peripheral bonds could come under pressure after Standard and Poor's warned against a Greek debt rollover plan, reminding investors of the risks involved in the debt crisis.

Greece last week approved key austerity measures and euro zone finance ministers gave the go-ahead for the next tranche of its 110 billion euro bailout deal, agreed last year.

But uncertainty remains over Athens's ability to implement the measures, while S&P warned against a plan to get the private sector involved in a Greek rescue plan through a voluntary rollover of their debt when bonds mature.

S&P's warning that it would consider two debt rollover proposals as selective default poured cold water over a market that had found some relief from a temporary solution to the Greek debt problem and signs of a rebound in the US economy.

Euro zone officials have been trying to involve the private sector in a Greek rescue plan without triggering a rating downgrade to default, which analysts say would have unforeseeable consequences.

"The relief that we had last week with the votes is now somewhat put on the back-burner by this news," said Marc Ostwald, strategist at Monument Securities. "It would be nice to have some more details on it."

The Bund future gained 21 ticks to 125.63 after falling two full points last week, its biggest weekly loss since May 2009. Volumes were thin with US markets closed for a public holiday.

Bonds on lower-rated peripheral bonds were mixed on the day but could come under pressure as Greece faces an uphill struggle this week to start the process of selling off state-owned assets and reforming its tax system to meet European Union and IMF conditions for bailing it out.

The deep spending cuts required under the loan terms have sparked weeks of at times violent protests on the streets of Athens.

Two-year Greek bonds yields fell 12.8 basis points to 26.71 percent, while yields on two-year Irish bonds were up 14 basis points at 13.74 percent.

The cost of insuring Greek government debt against default rose 23 basis points on the day to 1,875 bps. .

FUNDAMENTALS AT CENTRE STAGE

With the threat of an immediate Greek bankruptcy cleared for now, investors will be looking closely at economic data this week to gauge the health of the world's largest economy, especially now that the Federal Reserve has let its bond-purchasing programme expire.

"The summer months are going to be more about what the macro data is saying is going on in the global economy than...about specific events with respect to Greece," said Charles Diebel, head of market strategy at Lloyds Bank.

Finance ministers of the 17-nation euro zone currency area are due to agree on the outlines of the second Greek rescue package at a meeting in Brussels next week , but the details will not be signed off until September.

ISM's services sector report on Wednesday and a key US jobs report on Friday will give investors fresh insight into the state of the world's largest economy after recent data suggested the worst of a "soft patch" could be over.

Data on Friday showed the pace of growth in US manufacturing picked up for the first time in four months in June, even as consumer expectations on the economy remained bleak.

Investors are also bracing for a widely expected interest rate hike by the European Central Bank, with special focus on the press conference which they hope will shed light on the rates outlook.

Copyright Reuters, 2011