LONDON: Investors continued to shun Greece's bonds on Tuesday, still nervous about a potential debt restructuring, while rising yields at a Spanish T-bill auction pointed to further pressure on fringe euro zone paper.
Markets are pricing in a growing probability that, despite denials from Greek and EU officials, the country will need to restructure, pushing the country's credit default swaps and bond yields ever higher.
Euro zone figures showing the Greek budget gap hit a higher than expected 10.5 percent of output last year fuelled debt restructuring talk even more.
Against this backdrop, Spain is more closely scrutinised. Its short-term debt auction, touted as a test of the contagion fears in the market, drew solid demand, but yields rose almost half-a-percentage point from last month's sale.
"Although these yield levels are perhaps still currently more cause for concern rather than outright alarm, there is little scope for further such increases in short-dated funding costs before the market begins to get spooked over the prospect of Spanish contagion," said Richard McGuire, a rate strategist at Rabobank.
The 10-year Greek yield rose 51 bps on the day to 15.57 percent, with the paper trading at some 56 percent of its face value. Greek CDS rose 42 bps to 1,345 bps. Traders said there was little flow behind the moves, though.
In Portugal and Ireland, which were again hit by a raise in the additional margin required for long positions on their bonds by clearing house LCH.Clearnet, ten-year yields rose 19 and 13 bps, respectively, to 10.14 and 10.77 percent.
NOT PANICKING YET
Spanish ten-year bond yields rose almost 40 bps over the past two-weeks, erasing the gains made from early March, when investors believed it would decouple from Greece, Ireland and Portugal.
But on Tuesday, Spanish ten-year yields were up 0.2 basis points on the day at 5.51 percent, in sharp contrast with spikes seen elsewhere in the periphery, signalling some in the market find good value in Spanish paper at current levels.
While uncertainty over the impact of a Greek debt restructuring is still seen keeping weakening pressure on Spanish bonds, some analysts say investors are far away from panicking.
"I'm not sure if with Spain it's a question of when investors start to panic, it's probably more of a question of when they start to think that yields are attractive," said Huw Worthington, strategist at Barclays Capital.
"I think we are sort of approaching these kind of levels."
The Bund future was last at 122.46, 15 ticks higher than Thursday's close and trading in a narrow range. Risk aversion in the euro zone bond market has lifted safe-haven German Bund futures by over 2 full points since April 11, leaving technical charts signalling room for further gains.
"Statistically, Bund sentiment has reached the most positive levels in eight months with a strong percentage of new highs versus lows indicating investors' increasing willingness to pay higher prices," said PIA First director Max Knudsen.
The outlook for Bunds was cautiously bullish while above their recent rising trendline at 121.73, Knudsen said, adding the contract could test last week's high of 122.65.
Ten-year German Bund yields were 2 basis points lower on the day at 3.245 percent.
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