LONDON: German government bonds tumbled on Thursday after euro zone leaders struck a deal aiming to draw a line under the spiralling debt problems threatening the survival of the single currency, boosting appetite for riskier assets.
The cost of insuring against a default by peripheral countries, including Italy and Greece fell, and their bond yields were marked lower. Traders said there were no flows behind the prices but the European Central Bank was making aggressive offers to buy Italian paper.
Markets will need to see more details of how the proposals will work along with plans for rapid implementation for the sell-off to extend further, analysts said. Optimism quickly faded after previous "solutions" to the debt crisis were announced.
"Full credit to them for achieving something, even if it's not the be all and end all that we'd all really like but it takes us further away from the edge of the abyss for the time being," Nomura rate strategist Sean Maloney said.
Italian 10-year bond yields were 19 basis points lower at 5.74 percent, but still around 25 basis points higher than in early October when the leaders of Germany and France promised a far-reaching solution to the debt crisis.
Traders said the ECB was offering to buy Italian bonds with maturities of between five and 10 years.
"Ultimately the knee-jerk reaction we're seeing will probably fade so they are going for the maximum impact today with some very aggressive offers," a trader said.
"They're coming in before tomorrow's Italian supply. That just can't be seen to go badly after they've announced this plan."
The deal will see private holders of Greek bonds accept a 50 percent loss on their investments, while banks will be recapitalised and the size of the EFSF euro zone bailout fund will be scaled up to around 1 trillion euros .
"The true success of the agreement will be seen in Italian bond yields six months down the line rather than from the sugar-rush reaction we might see today," said Gary Jenkins, head of fixed income at Evolution Securities.
December Bund futures were 140 ticks lower at 134.22, although off lows hit in early trade.
Nomura's Maloney said the focus may shift back to economic fundamentals with US GDP data due later in the session and Federal Reserve and European Central Bank meetings next week.
"In Europe the most worrying thing was this week's numbers suggesting the region is tilting closer to a recession, while the fallout from all the recent uncertainty is likely to linger a while longer," he said.
"For that reason I wouldn't jump on a big sell-off in Bunds here. Our view is that we settle into a range."
Ten-year cash German yields were up 10 basis points at 2.16 percent, having hit a recent high of 2.25 percent last week.
The euro hit a seven-week high versus the dollar and European shares rallied.
Italy's sale of up to 0.75 billion euros of 10-year euro zone index-linked bonds on Thursday will be an early test of sentiment before a sale of up to 7.5 billion euros of conventional bonds on Friday.
Under huge pressure from its euro zone partners, Rome has promised a package of reform steps to boost growth and control its public debt.
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