LONDON: German government bonds rallied on Thursday, catching up with US Treasuries after the Federal Reserve indicated it would keep rates ultra-low for longer than previously suggested, with continued fears of a chaotic Greek default also supportive.
Federal Reserve Chairman Ben Bernanke said on Wednesday that the US central bank might consider further monetary easing through bond purchases. The Fed also pushed back the likely timing of an eventual interest rate hike until late 2014, 18 months later than its previous expectations..
"You could argue low rates forever is marginally risk supportive but on the other hand the Fed couldn't be any more dovish, and you could argue they're pre-committing or you can argue they think the world is a lot more horrible than anyone else thinks," a trader said.
March Bund futures were 45 ticks higher at 138.27, having risen as far as 138.44 but failing to break through Monday's 138.45 high. Ten-year yields were almost 3 basis points lower at 1.919 percent.
"We seem to have rejected the 2 percent level in Bunds and survived from a technical point of view," the trader added.
"There's definitely been some tentative buying coming back into the market and the buying of the periphery has stopped ... the shorts have all been covered."
Ten-year US Treasury yields retreated sharply on Wednesday, taking them back below 2.0 percent.
The spread between Bunds and higher yielding US Treasuries narrowed around 5 basis points compared with Wednesday's European settlement close, to 5 basis points, as Treasuries outperformed after the Fed's decision.
Also supportive for Bunds are the protracted Greek debt swap talks. The top negotiator for private creditors will return to Athens to resume talks with officials as the clock ticks ahead of a March deadline when Greece faces major bond redemptions.
Aside from the risk of a messy Greek default, markets fear that any agreement could be used as a model for other sovereigns despite officials emphasising that Greece is a unique case.
That has pushed Portuguese 10-year bond yields and the cost of insuring the country's debt against default to record highs.
Some banks are quoting the cost of five-year credit default swaps on an upfront basis, meaning that a percentage of the notional amount - around 37 percent according to Markit pricing of 37 points upfront - must be paid when the contract is entered into, typically a signal that a credit is distressed.
"Portugal will need to restructure at some point as, like Greece, they relied a lot on foreign investors and don't have the domestic market to buy their bonds like Italy and Spain," said Alessandro Giansanti, rate strategist at ING.
Another bailed-out state, Ireland, got a better reception from markets, managing on Wednesday to extend the maturity of 3.5 billion euros of bonds to 2015 from 2014, in its biggest test of sentiment since exiting funding markets in 2010.
The prospect that the European Central Bank may be forced to take losses on its holdings of Greek bonds has added to the uncertainty of the debt talks and has also taken the shine off the rally in risk assets seen over the last couple of weeks .
Italy will test sentiment with a sale up to 5 billion euros of zero coupon (CTZ) and inflation-linked bonds ahead of a longer-term debt auction on Monday.
"Recent demand for shorter-dated paper has remained strong and we would expect nothing to change here with the CTZ likely to find good demand," Credit Agricole rate strategist Peter Chatwell said.
"The linker has rallied tremendously over the past two months and we suspect this means that the street may already be short of the paper, so the tap is also likely to proceed with minimal difficulty."