EURO GOVT-Bunds pause after sell-off; wait for Irish deal

* Bunds pause, wait for news on Irish bailout

* Irish talks expected to head into the weekend

* Treasuries supportive after Bernanke defends QE

By Kirsten Donovan

LONDON, Nov 19 (BestGrowthStock) – German government bonds rose on
Friday after selling off heavily the previous day, while euro
zone peripheral debt was becalmed as investors waited to see if
Ireland would seal a deal to shore up its banking sector.
Ireland is in discussions over an aid package worth tens of
billions of euros from the European Union and International
Monetary Fund but with Dublin not at the point of requesting a
loan, talks were expected to run into next week [ID:nLDE6AH0HV].

With still severe fiscal problems in Ireland and fears of
contagion, particularly to Portugal, peripheral issuers have
only modestly benefited from this week’s 120 tick sell-off in
Bund futures.

“A lot of the Irish news is already priced into the
periphery and if they do get a bailout, the question is going to
be who’s next,” a trader said.

The 10-year Irish/German government bond yield spread was 5
basis points tighter at 560 bps and other peripheral spreads,
although consolidating, remained close to their recent, and in
some cases euro lifetime, highs.

Take a Look on Irish crisis [ID:nLDE68T0MG]

Interactive timeline on euro zone crisis

Reuters Breakingviews column on Irish [ID:nLDE6AI0FX]

Analysts said although there may be something of a relief
rally in peripheral bonds if an Irish deal is announced, they
would probably remain under pressure going forward.

“The longer-term issue of possible restructuring will
persist until the spectre of further banking system losses
impacting the public finances is removed,” Lloyds TSB
strategists said in a note.

“And bonds not covered by the almost explicit
protection of the European Financial Stability Facility — those
maturing beyond 2013 — will still be prone to nervous

December Bund futures (FGBLZ0: ) were 24 ticks higher at
127.74, supported in part by higher U.S. Treasuries and in
reaction to Thursday’s fall, which traders said was overdone.

“We’ll possibly see a bit of a recovery (in Bunds) today, a
lot of longs have been liquidated and positioning looks a lot
cleaner at these levels,” the trader said.

Two-year yields (DE2YT=TWEB: ) were down 2 bps at 1.09 percent
but still close to their highest levels since January, with
10-year yields (DE10YT=TWEB: ) down almost 3 bps at 2.677 percent.

Although benefiting from safe-haven flows in recent weeks
Bunds failed to match their performance ahead of the Greek
bailout in May.

Ten-year German yields fell by only just over half as much
in percentage terms in the run-up to the Irish talks, despite
also being supported by the reinstatement of the Federal
Reserve’s quantitative easing programme.

“There may be a more general creeping concern that these
peripheral problems could spread and eventually start to effect
the core in more in a more adverse manner,” said Jonathan
Loynes, Chief European Economist at Capital Economics.

“The potential impact on Germany and France to keep, for
example, Spain afloat would be huge.”


Bunds were supported by higher U.S. Treasuries after Fed
Chairman Ben Bernanke hit back at critics of the U.S. central
bank’s bond-buying programme. [ID:nN18107490]

Credit Agricole strategists said that having tested
four-month lows of 127.37 on Thursday, a break of that level
could lead Bunds down to June’s low of 127.12, while a break
below 124-00 in U.S. T-note futures (TYc1: ) could bring the
psychological 3 percent 10-year yield level into sight.

EURO GOVT-Bunds pause after sell-off; wait for Irish deal