EURO GOVT-Bunds steady, periphery remains pressured

* Peripheral yields drift higher as Fitch weighs Greece cut

* Bunds steady as market winds down for Christmas

* Banks prepare to repay 200 bln euros to ECB

By Kirsten Donovan

LONDON, Dec 22 (BestGrowthStock) – Bonds issued by highly indebted
euro zone countries remained under pressure on Wednesday after
Greece was threatened with another rating cut, while German
Bunds were steady as the market wound down for the Christmas
break.
Fitch Ratings said late on Tuesday there was a growing
probability it would cut Greece to junk [ID:nLDE6BK1XS], just
hours after Moody’s said it was reviewing Portugal’s credit
rating [ID:nLDE6BK0HE].

The move would bring Fitch’s rating on Greece in line with
Moody’s and Standard & Poor’s, who already have sub-investment
grade ratings on the country, although both are on review for
further downgrades.

“There’s been no clarity on what European Union leaders will
do to deal with the debt crisis,” said Investec economist Philip
Shaw.

“That uncertainty, coupled with the threat of downgrades to
various peripheral countries has led to more spread widening and
a weaker euro.”

Greek 10-year bond yields (GR10YT=TWEB: ) rose 3 bps and are
above 12 percent.

Portugal was a notable underperformer with 10-year yields
(PT10YT=TWEB: ) up 6.5 bps at 6.76 percent, although it came off
earlier highs around 6.8 percent after Portuguese newpaper
Jornal de Negocios said China was ready to buy 4 to 5 billion
euros of Portuguese sovereign debt to help the country ward off
pressure in debt markets [ID:nLDE6BL0MW].

“The only new thing is the figure but the report is
unsourced so although it’s providing a bit of support, clients
certainly aren’t putting much weight on it,” said one trader.

China on Tuesday said it backed Europe’s efforts so far to
tackle debt problems but made clear it would like to see the
measures having more effect [ID:nTOE6BK01Q].

SOME RESPITE

The pre-Christmas market lull has taken some of the heat off
peripheral euro zone debt, but analysts expect pressure to
intensify again in the New Year when governments must issue
bonds to repay maturing debt.

“The danger is investors aren’t putting their chips on the
table at this time of year and come January 4 that there is
renewed selling pressure on peripheral bonds and the currency,”
Investec’s Shaw said.
Already this month, Moody’s has put Spain and Greece on
review for possible downgrades and cut Ireland’s rating by a
savage five notches, while S&P said it may cut Belgium’s debt
rating next year.

Yield premiums over Bunds have been trending higher with the
10-year Spanish spread near 260 basis points, up from around 225
bps at the start of this month, and the Portuguese spread up
around 60 bps.

Portugal faces debt repayments of almost 10 billion euros
between April and June, according to Reuters data, as well as
over 2.5 billion euros of interest payments and many believe
that with its borrowing costs so high it will be forced to
access financial aid.

Meanwhile, the European Central Bank was among those that on
Tuesday extended its U.S. dollar liquidity-providing operations
with the U.S. Federal Reserve. The bank also issued almost 50
billion euros more of 3-month money at a tender than the amount
forecast in a Reuters poll previously. [ID:nLDE6BL0RR]

“The extension of the FX swap agreement between the six
largest central banks and the rating agencies’ threats to
downgrade Greece and Portugal … are a reminder that the
sovereign debt crisis will stay with us also in the New Year,”
said Commerzbank rate strategist Rainer Guntermann.

March Bund futures (FGBLc1: ) were 6 ticks lower at 125.11.
Two-year bond yields (DE2YT=TWEB: ) were 3.5 bps lower at 1.004
percent, with 10-year yields (DE10YT=TWEB: ) down 1.3 bps at 2.971
percent.

EURO GOVT-Bunds steady, periphery remains pressured