EURO GOVT-Bunds fall on worries over bailout costs

* Bunds lower on worry over cost of funding periphery

* Periphery calm but underlying pressure builds

* Month-end beneficial for non-German core

(Updates to midsession)

By Kirsten Donovan

LONDON, Nov 25 (BestGrowthStock) – German government bonds fell on
Thursday, pressured by the financial implications for core
issuers of potential further euro zone bailouts and by recent
data highlighting the strength of the region’s largest economy.

Trade was thin, however, due to the U.S. Thanksgiving
holiday, exacerbating market moves.

The euro zone periphery was subdued, belying rising tensions
with fears of contagion from Ireland’s debt crisis still high.
Irish and Spanish bonds underperformed with 10-year yield
spreads over Bunds up to 10 bps wider.

The euro struggled near a two-month low (EUR=: ) and Spanish
and Portuguese yields added to their roughly 20 bps gains the
previous session [ID:nLDE68T0MG].

Bund futures (FGBLZ0: ) were almost unchanged on the week and
near their lowest levels since June, struggling to benefit from
the periphery’s troubles and pressured by upbeat German data,
including Wednesday’s Ifo business sentiment index.

“The market is realising who is going to be footing the bill
for these bailouts, especially with Spanish yields starting to
push out quite aggressively,” a trader said.

Portuguese 10-year bond yields (PT10YT=TWEB: ), at more than
7 percent, are already above the level at which Ireland and
Greece stopped accessing bond markets and also well above the
roughly 5 percent Lisbon would pay to borrow from the European
Financial Stability Facility.

Spanish yields (ES10YT=TWEB: ) topped 5 percent on Wednesday.

“The next step could be that core Europe will take
significantly more responsibility for the rest of Europe,” RBC
rate strategist Peter Schaffrik said.

“We could see a big credibility and potentially money
transfer, even more than we have at the moment if, for example,
Spain can’t fund themselves.”

European Central Bank Governing Council member Axel Weber
said on Wednesday he believed euro zone states could come up
with more money if the existing 750-billion-euro safety net ever
proved insufficient.

Germany’s proposal euro zone government bonds should include
private sector liability clauses from 2011 to ensure a smooth
transition to a new rescue mechanism from 2013 also added to
market uncertainty [ID:nLDE6AN1ID].

“European policymakers are doing little to quell current
fears and we think the continued confusing political rhetoric is
driving investors out of Europe,” Nomura rate strategists said
in a note.

“The concern at this stage is that it may take a significant
amount of time for investors to regain confidence in European
markets, which will affect issuance come auction time.”
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic euro zone struggles with debt

http://r.reuters.com/hyb65p

Euro zone peripheral economies comparison graphic

http://r.reuters.com/zem66q

Peripherals’ CDS curves graphic

http://r.reuters.com/xyq76q
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

December Bund futures were 10 ticks lower in choppy trade at
127.62, with Wednesday’s price action — a rally higher than
Tuesday’s high but an ultimate close below Tuesday’s low —
leaving a bearish outlook, the trader said.

Two-year German yields (DE2YT=TWEB: ) were 2 bps lower at
0.953 percent, with 10-year yields (DE10YT=TWEB: ) up a third of a
basis point at 2.664 percent and breaking above the 200-day
moving average. Higher European stocks also pressureed Bunds.

Concern over the health of the banking sector in peripheral
countries and the level of exposure of financial institutions in
core states have seen the iTraxx senior financials credit
default swap index widen more than 30 bps this week and banking
stocks on track for their biggest weekly loss since the start of
October (.SX7P: ).

MONTH-END

With month-end approaching, Credit Agricole says index
duration extensions are modest for France, the Netherlands and
Finland, and strong for Ireland and Spain — two countries whose
debt investors are “clearly underweighting”.

“We make an assumption that rather than extending into
these markets, investors might instead extend into Italy. This
may go some way to explain the recent strong richening of
15-year BTPs.”

(Graphics by Scott Barber)

EURO GOVT-Bunds fall on worries over bailout costs