LONDON, Sept 12 (Reuters) – December Bund futures rose to a contract high and Greek bond prices sank to new lows on Monday as investors saw a growing chance Greece would be forced to default on its debt — bringing the strength of the region’s banking system into question.

The prospect of repeated fiscal slippages causing Greece to lose aid funding and default raised worries about French banks – large holders of Greek debt — and was seen continuing to push demand for the relative safety of German Bunds higher.

“It’s not so much the information about Greece now, it’s more about the fears of the domino effect if Greece has to do a hard restructuring,” said Nordea’s chief analyst Niels From.

The December Bund future hit a contract high at 138.61, up by three-quarters of a point, and the yield on the largely-illiquid market for short-dated Greek debt soared by 19.8 percentage points to almost 83 percent.

Shares in French banks tumbled by more than 10 percent on the day and the euro weakened against the dollar , sinking to a seven-month low before paring some of those losses.

Ten-year Bund yields hit a low of 1.707 percent and RIA Capital Markets strategist Nick Stamenkovic expected a further fall towards 1.5 percent in the absence of any positive news in the near future.

Markets were unimpressed by Greece’s latest efforts to ensure it meets fiscal targets necessary to ensure a continued supply of bailout funding.

LONDON, Sept 2 (Reuters) – Euro zone interest rate futures extended their recent rally on Friday as investors increased their bets that weak growth in the region and globally would lead the European Central Bank to ease policy before year-end.

Euribor futures <0#FEI:> rallied by around 8 ticks across the curve, building on similar gains made on Thursday after data showing a widespread slowdown in euro zone manufacturing.

“There is a shift happening. With people looking at (ECB President Jean-Claude) Trichet’s departure at the end of October the potential for a shift in policy is perhaps growing,” said Simon Smith, chief economist at FxPro in London.

“That’s why you’re seeing (longer-dated) contracts doing much better than the near months because people aren’t thinking that policy will be changed straightaway but potential for an easing is growing.”

The December contract rose 9 ticks to 98.78. That move, if sustained on a closing basis, could break the current pennant pattern on charts, sparking a sharp rally, said Mizuho technical analyst Nicole Elliott.

“In theory, the contract could get up to 99.40. Obviously if it’s going to do that then we must expect or be guaranteed a rate cut before the (delivery of the contract) in December, which is very possible,” she said.

A more conservative target would be around 99.12 — the 61 percent Fibonacci level of the 70 basis point rise that makes up the pennant pattern’s ‘flagpole’.

LONDON, Sept 1 (Reuters) – Bund futures rose on Thursday driven by grim economic data from the euro zone and fresh signs that the ECB’s recent intervention in bond markets was not enough to convince investors to buy new debt issued by Italy and Spain.

Spain launched a new five-year benchmark bond with a 3.6 billion euro sale but demand for the debt was weak despite an attractive yield relative to other Spanish paper.

Spanish and Italian yields rose across the curve, though the moves were limited with traders reporting the ECB was buying up the countries’ debt in secondary markets.

The auction added to concerns, raised earlier this week by a lacklustre Italian debt sale, that even with the support of the European Central Bank both Spain and Italy could struggle to finance themselves at affordable rates.

“The market now is not so willing to buy, especially after the spread tightening (over German yields). It will not be easy for Italy and Spain to issue in this environment,” said Alessandro Giansati, rate strategist at ING in Amsterdam.

The bank began buying Spanish and Italian paper in early August to head off rising bond yields that threatened to reach unsustainable levels.

The Spanish 10-year bond yield was 1 basis point higher on the day at 5.068 percent, though traders said the ECB was absorbing the selling pressure in the market. Equivalent Italian yields were up 1.5 bps at 5.158 percent.

LONDON, Aug 31 (Reuters) – Euro zone bank demand for long-term emergency loans from the ECB remained high on Wednesday, showing that while tension in interbank markets was not increasing, funding for some institutions remained difficult.

Banks took 49.4 billion euros of three-month loans from the European Central Bank, slightly above the amount expiring, leaving the system awash with cash in a sign that longer-term interbank lending remains restricted.

“I would rather say this demand is from bad banks who can’t access the market because the difference between Eonia (market rates) and the rate at these tenders is quite high,” said Alessandro Tentori, rate strategist at BNP Paribas.

The loans bore a rate starting at 1.5 percent, in comparison to the market-determined three-month Eonia rate of 0.89 percent. A total of 128 banks asked for cash at the tender.

Highlighting the funding difficulties facing some weaker banks, Greece’s Piraeus Bank (BOPr.AT: Quote, Profile, Research, Stock Buzz) said it had used the Greek central bank’s Emergency Liquidity Assistance mechanism, at a cost of about 3.5 percent, in the third quarter.

Uncertainty over whether Greek government bonds will continue to be eligible as collateral against cheaper loans available from the ECB after Greece undertakes a bond swap next month could have spurred the move, analysts said.

“(Greek banks) use a lot of Greek government bonds as collateral which have a huge haircut at the ECB… one reason for this (ELA usage) is that the haircut at the ECB is a limit on the quantity of money they can borrow,” Alessandro Giansanti, strategist at ING in Amsterdam.

LONDON, Aug 30 (Reuters) – Signs of weak demand at Italy’s bond auction spooked investors on Tuesday with traders saying the ECB was buying debt aggressively after the sale to keep a lid on rising Italian yields

Despite offering a yield higher than the current benchmark, the launch of a new 10-year bond failed to attract strong bids with the bid/cover ratio — reflecting demand — below the average seen this year.

Traders said the European Central Bank quickly stepped into the secondary market as the 10-year Italian/German yield spread hit its highest since the bank began buying Italy’s bonds on Aug. 8.

The ECB earlier this month agreed to buy Spanish and Italian bonds — the so-called “tier 2″ sovereigns — in a bid to prevent market pressure pushing yields to unsustainable levels in the same fashion as Greece, Ireland and Portugal.

“There’s no real demand for tier-2 paper and so even though it was possible to place bonds here, you see the size of the issue was at historical lows for a 10-year benchmark launch,” said Norbert Aul, strategist at RBC Capital Markets.

German Bund futures FGBLc1 rallied after the auction as investors sought out less risky assets. Yields on Italian 10-year debt were up 3.5 basis points at 5.13 percent, off a session high of around 5.16 percent.

Focus will now turn to Spain ahead of a 4 billion euro sale of new five-year bonds on Thursday. .

LONDON, Aug 30 (Reuters) – Greece’s bond swap proposals may hold enough value to encourage participation by investors holding its increasingly risk debt, and could even prompt some funds to buy up the country’s paper just to take part in the exchange.

The four bond exchange options laid out in a formal letter to investors are designed to impose uniform losses of 21 percent, in net present value terms, on debtholders as part of attempts to share the burden of Greece’s second bailout deal.

Despite the haircuts involved in the swap, for current bondholders — or fresh investors — who believe it will allow Greece to draw a line under its fiscal problems and avoid a more painful debt restructuring, analysts say depressed Greek bond prices mean the deal could offer good value.

The proposal, which forms part of a bailout package agreed in July, aims to ease Greece’s debt burden by swapping bonds with a maturity of up to 10 years for 30- or 15-year bonds with additional guarantees which make them less risky to hold than the original bonds.

“For people now holding bonds trading at very distressed levels, it makes sense for them to participate. Not participating implies harbouring a huge risk,” said Matteo Regesta, strategist at BNP Paribas in London.

The risk for those considering holding on to their original bonds is that failure to gain enough participation stalls the deal and pushes Greece towards forcing deeper losses on investors or, at worst, defaulting on repayments.

“The implicit threat of forced private sector involvement should prompt many investors to consider the offer,” Commerzbank interest rate strategists said in a note.

LONDON, Aug 30 (Reuters) – Italy sold nearly 8 billion euros of government bonds on Tuesday in a keenly awaited auction that, despite recent ECB support, met relatively weak demand and threatened to re-ignite market pressure on the highly indebted country.

Lower-than-expected demand at the auction — seen as a key test of emergency steps taken to control the euro zone debt crisis — pushed Italian bond yields higher and sparked a rally in safe-haven German debt FGBLc1.

The rise in yields, which nonetheless stayed well below levels hit before the European Central Bank began buying Italian debt three weeks ago, raised questions about the sustainability of Rome’s funding efforts and threw the focus on to a Spanish bond auction on Thursday.

Traders said the ECB stepped in after the auction to buy significant amounts of 10-year Italian debt, halting the rise.

“The results look a bit worse than the market was expecting, with the 10-year looking weak with a rather small bid cover ratio,” said Credit Agricole rate strategist Peter Chatwell.

“The market is likely to lose a bit of confidence from this auction until 10-year Italy stabilises, which is in the ECB’s hands.”

The launch of a new 10-year benchmark bond drew bids worth 1.27 times the 3.75 billion euros sold, below the year’s average bid-cover ratio on equivalent auctions of 1.4.

LONDON, Aug 30 (Reuters) – Italy returned to bond markets on Tuesday with a 7.74 billion euro sale that met relatively weak demand despite the ECB buying Italian debt in recent weeks, sparking a nervous reaction among investors.

Signs of lower-than-expected demand at the auction – awaited as a crucial test of emergency steps taken to stem the spread of the euro zone debt crisis — pushed Italian bond yields higher and sparked a rally in safe-haven German debt FGBLc1 immediately after the sale.

Traders said the European Central Bank stepped in after the auction to buy significant amounts of 10-year debt, bringing yields back down.

“The results look a bit worse than the market was expecting, with the 10-year looking weak with a rather small bid cover ratio,” said Credit Agricole rate strategist Peter Chatwell.

“The market is likely to lose a bit of confidence from this auction until 10-year Italy stabilises, which is in the ECB’s hands.”

The launch of a new 10-year benchmark bond drew bids worth 1.27 times the 3.75 billion euros sold, below the year’s average bid-cover ratio of 1.4.

The ECB began buying Italian debt on the secondary market earlier this month, bringing benchmark 10-year yields down from levels well above 6 percent, seen as unsustainable, to around 5 percent.

LONDON, Aug 29 (Reuters) – Bund futures fell on Monday as riskier assets rallied on signs that the U.S. Federal Reserve would consider a fresh batch of economic stimulus at next month’s policy meeting.

At a key speech on Friday, U.S. Federal Reserve Chairman Ben Bernanke stopped short of announcing how the Fed might act to stimulate the U.S. economy. But Bernanke left the door open for further monetary easing by extending the bank’s September policy meeting to two days.

This boosted hopes of further stimulus among some investors, pushing equities higher and easing demand for less-risky government bonds.

The Bund futures contract FGBLc1 was last 38 ticks lower at 134.83, with a public holiday in the UK expected to limit trading volumes. European stocks were around 0.7 percent higher on the day.

“Now the market is waiting for the minutes of the August FOMC meeting and also upcoming indicators which could lead the Federal reserve to take further decisions at the next FOMC,” said BNP Paribas rate strategist Patrick Jacq in Paris.

Markets were now likely to be highly sensitive to signs of increasing economic weakness that would support the case for a fresh round of stimulus. Top-tier data releases on manufacturing activity and employment are due later in the week.

“Clearly hard data are now very important for the market… There is probably some room for the market to be shaken further – a lot of vulnerability and volatility ahead of the figures,” Jacq said.

LONDON, Aug 25 (Reuters) – Greek bond yields continued to set new highs on Thursday as wrangling over demands for capital to back other euro zone states’ bailout contributions fuelled worries over the implementation of the rescue plan.

In core euro zone bond markets, volatility dominated with Bund futures ending the session slightly up, having been driven by a swing in equity market sentiment throughout the afternoon.

The volatility is likely to continue in Friday’s session as markets wait for a key speech by U.S. Federal Reserve Chairman Ben Bernanke.

Greek two year yields continued to rise, topping 46 percent to set a new record high, although traders said flows were extremely thin and markets remain largely illiquid and inactive.

The impetus for dealers to mark Greek yields higher came from wrangling over a deal to back Finnish contributions to Greece’s bailout with collateral, which some say threatens to undermine the whole rescue package.

“Greece is back at the forefront on the collateral worries and consequently investors are fretting the debt exchange might not go successfully leading to an unravelling of the second bailout package,” said RIA Capital strategist Nick Stamenkovic.

Greece agreed last week to provide cash collateral for triple-A rated Finland’s loans in a bilateral deal that sparked requests for similar treatment from Austria, the Netherlands and Slovakia.