LONDON, Jan 20 (Reuters) – A second straight session of steep losses left German Bund futures on track for their biggest weekly fall in nearly two months as markets anticipated Greece would strike a deal on debt writedowns.

Signs of progress in negotiations between Greece and its creditors over how much of the country’s crippling debt can be written off looked to be edging towards a conclusion, easing the likelihood of a disorderly default in March.

That prompted a shift out of safe havens, sending Bund futures down by over a point to their lowest in two weeks at 137.86 and helping Italian and Spanish and other peripheral bonds to extend their recent outperformance.

“We’ve been building confidence in Greece and the IIF (Institute of International Finance) arriving at some conclusion over the last two sessions,” said Peter Chatwell, rate strategist at Credit Agricole in London.

The shift out of safe-havens and into riskier assets would probably continue if a deal did materialise, but with the success of a deal still dependent on successful implementation, moves could be limited in size.

“We can’t really go selling off Bund futures too hard and getting too optimistic because there’s still more twists and turns yet for this tale to take,” Chatwell said.

For an overview of the possible outcomes of the Greek debt talks see

LONDON (Reuters) – Greece must persuade its creditors to take a hefty loss on their investments in order to unlock the aid money it needs to stay afloat, but talks are proving tough, making a messy default in March a real prospect.

The struggling sovereign, also racked by a five-year-old recession, must strike a deal to reduce its towering debt stock by 100 billion euros to continue receiving bailout money from its European partners and the International Monetary Fund.

But private creditors are baulking at current proposals. Bondholders are thought to be a mix of mainly European banks, wincing at the prospect of further writedowns on their loans, and hedge funds who bought the bonds cheaply and are looking to maximize their return.

Sovereign wealth funds, insurers and Greek pension funds also hold Greek debt. Around 206 billion euros of bonds are considered eligible for the deal, meaning debtholders are facing a minimum writedown of 50 percent providing they all take part.

The European Central Bank has significant holdings but is not considered a private creditor and has said it is not involved in the negotiations.

The talks are likely to result in a default by some definitions. For a factbox on different interpretations of default, see:

Below are some of the possible outcomes of the talks:

LONDON, Jan 18 (Reuters) – Strong demand for ultra-low yielding German government debt underlined on Wednesday the high tension in markets as Greece resumed debt negotiations in an effort to avoid a messy default.

Greece’s last-ditch efforts to seal a deal with bondholders - needed to reduce its debt and secure vital aid funding – kept Bund futures near record highs as fear grew that failure could push the country into a disorderly default.

Talks between private sector creditors and officials resumed on Wednesday in a bid to break the deadlock over how big a loss investors are willing to take on their loans to Greece. .

“Discussions seem to be on a knife edge,” said Nick Stamenkovic, rate strategist at RIA Capital Markets. “The longer they go on then the more the market will suspect an agreement is not forthcoming as time is running out.”

IMF sources said the Fund estimated it would need $500 billion to lend to member countries with $100 billion as a “protection buffer”..

Attention turned to Spain, which sells up to 4.5 billion euros of longer-term bonds on Thursday, after shorter-dated auctions last week met with very strong demand.

Yields on the January 2022 10-year paper on offer were little changed at 5.46 percent. Traders believe Spanish banks are loading up on bonds eligible as collateral at the ECB’s next offering of three-year funds in late February.

LONDON, Jan 18 (Reuters) – Europe still has a chance of safely shepherding Greece through an increasingly inevitable default and could restore faith that investors can protect themselves against governments not repaying debt.

Time is fast running out. Greece cannot pay a 14.5 billion euro ($18.5 billion) bond falling due on March 20, and a deal with bondholders needs to come well before that, because the paperwork alone takes at least six weeks.

Many in markets would welcome an orderly default, whereby Greece’s lenders allowed it to renege on its commitments to repay, provided it avoids a far more painful hard default, which could herald the end of the single currency.

“People often ask if Greece is going to default which … is a misnomer because Greece is (already) defaulting,” said Richard McGuire, a strategist at Dutch bank Rabobank.

A managed default would trigger a pay-out of Credit Default Swaps (CDS), which offer insurance against default of a company or country, and would restore trust in these financial tools that are crucial for investors to hedge against risk.

“Regulators across the world would breathe a sigh of relief that hedges many of their regulated financial entities have on their European positions are effective,” said one market participant, asking not to be named.

The future of the market for sovereign CDS has been put in doubt because politicians were initially adamant banks and other investors should voluntarily swap their Greek bonds for new ones worth half the original value. Such a voluntary agreement would likely leave investors unable to claim the protection offered by CDS.

LONDON, Jan 18 (Reuters) – German Bund futures rose on Wednesday, supported by demand for low-risk assets as Greece resumes the difficult task of negotiating writedowns with private creditors in a bid to avoid a costly default.

Greece’s last-ditch efforts to seal a deal with bondholders – needed to reduce its debt and secure vital aid funding – were set to keep Bunds near record highs as fear grows that failure could push the country into a disorderly default.

Talks between private sector creditors and officials resume on Wednesday in an effort to break the deadlock over how much of a loss investors are willing to take on their loans to Greece.

“Everything is about Greece today… over the next three days these negotiations will drive the market,” said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.

Any sign of a voluntary agreement would probably cool some of the safety bid for German debt, Georgolopoulos said, while tensions were likely to stay high if no deal is struck before next week’s regular meeting of euro zone finance ministers.

Bund futures rose to 139.89, up 21 ticks on the day and within half a point of the record-high 140.23 set last week.

A German auction of two-year debt later in the session will test how willing investors are to buy paper which carries an ultra-low yield but is perceived to be a safe haven owing to its high liquidity and the backing of the robust German economy.

LONDON, Jan 13 (Reuters) – Yields on Italian and French debt jumped on Friday after sources said that an anticipated wave of downgrades from Standard and Poor’s was due later in the day, sending safe-haven German bond futures to a record high.

Senior euro zone sources said several sovereign ratings would be cut by Standard and Poor’s, following through on a warning shot issued in December. One source said Germany and the Netherlands would retain their triple-A status.

That compounded negative market sentiment sparked by a sale of Italian bonds earlier in the day which failed to live up to high expectations set by a strong Spanish auction on Thursday.

Italian 10-year yields rose by as much as 17 basis points to 6.82 percent, reversing some of the large outperformance seen over the course of the week.

French, Spanish and Belgian debt – all also at risk of a downgrade – underperformed German Bunds, widening 10-year yield spreads by 15 to 25 basis points.

“Yes, this S&P move has been well-flagged… but this just illustrates how fragile the markets are, and the fact that the strength we’ve seen this week might be more down to ECB action than any underlying return of confidence,” said Elizabeth Afseth, analyst at Evolution Securities.

Later, the European Central Bank was seen buying Italian bonds and bringing yields off their highs.

LONDON, Jan 12 (Reuters) – The European Central Bank disappointed traders hoping for fresh clues on the path of interest rates on Thursday, but signs were growing that efforts to free up interbank funding markets were beginning to take hold.

The central bank kept interest rates steady at its monthly rate-setting meeting and offered little insight into whether it would consider cutting the refinancing rate from its current record low 1 percent.

However, ECB President Mario Draghi pointed to signs that its injection of half a trillion euros into the euro zone banking system in December had helped to avoid a credit crunch, highlighting the reopening of unsecured bond markets.

Covered bond issuance in Europe has risen in early 2012 with more than a dozen deals lifting optimism the asset class will help banks meet their record 2012 funding needs.

“There’s no doubt (the ECB lending) is helping banks secure much needed funding which, if you go back a few weeks, was an issue,” said Lloyds Bank strategist Eric Wand.

Booming demand for short-term sovereign treasury bills and sinking money market rates supported the view that there has been some improvement since the ECB lent banks 489 billion euros for an unprecedented three years.

Italy became the latest sovereign to benefit from the glut of cash sitting with banks, as the ailing sovereign managed to sell short-term debt worth 8.5 billion euros at half the cost it had to pay in mid-December.

LONDON, Jan 10 (Reuters) – Euro zone banks cut their weekly borrowing from the European Central Bank by 20 billion euros on Tuesday, but the huge cash surplus providing life-support to the banking sector looks set to remain over the long term.

Banks’ need for short-term loans typically falls as the demand for cash to place on reserve at the ECB eases towards the end of a monthly cycle, but the decline has been accelerated by the central bank’s provision of more, longer-term loans.

This was reflected in falling demand for the ECB’s weekly funding injection. Borrowing fell to 110.9 billion euros, down from 130.6 billion euros last week.

Euro zone banks took up 489 billion euros late last month in the first of two opportunities to access the three-year loans - operations the ECB hopes will minimise the chances of them slashing lending in response to the region’s debt crisis.

Despite the decline in week-to-week funding, the amount of cash in excess of what the ECB estimates banks need was set to keep rising and remain high over at least the next year.

As a result overnight rates are anchored at rock-bottom levels and longer-term rates look likely to extend their falls.

“It’s definitely suppressive. It keeps short-dated rates subdued and that’s why you’re seeing the (German two-year) Schatz where it is, Euribor has been falling, Eonia remains subdued and will remain that way,” said Orlando Green, strategist at Credit Agricole in London.

LONDON, Jan 9 (Reuters) – Spanish government bond yields fell on Monday, reversing part of a sharp rise in borrowing costs last week, with traders citing an appetite to book short-term profits despite a negative outlook.

Spanish 10-year yields fell more than 15 basis points. Traders said investors bought the bonds to close out profitable short positions after a sharp rise in yields in the previous week. Spain and Italy are due to issue bonds this week.

Italian 10-year bond yields had also fallen earlier, but stabilised in late trade with the 10-year Italian/German government bond yield spread widening 3 basis point on the day to stand at 531 bps in late European trading.

“We wouldn’t be surprised to see a bit more cautiousness ahead of the auctions but on the other hand we are not seeing more selling pressure, which might be an indication that the necessary price concessions are more or less in the price already,” Rainer Guntermann, strategist at Commerzbank.

Bond prices typically fall ahead of an auction as dealers clear space on their books for the influx of new debt.

Spanish yields shed 15.5 bps to 5.6 percent, but 10-year Italian government bond yields remained above the psychologically important 7 percent level — above which funding costs are perceived to be unsustainable over the long-term.

Spain and Italy will be closely watched in the run-up to their first debt auctions of the year, with little sign investors have started 2012 any keener to buy the countries’ bonds than they were in 2011.

LONDON, Jan 9 (Reuters) – Spanish and Italian bond yields fell on Monday, reversing part of a sharp rise in borrowing costs last week, with traders citing an appetite to book short-term profits despite a negative outlook on both countries.

Italian and Spanish 10-year yields fell by 9 and 14 basis points respectively on the day. Traders said investors bought the bonds to close out profitable short positions after a sharp rise in yields the previous week.

“This doesn’t seem to be a move based on news flow… what we’ve seen this morning is some position squaring – a natural reaction to the heavy moves we’ve seen over the last week,” said Michael Leister, strategist at DZ Bank in Frankfurt.

The fall in Italian yields left the benchmark 10-year borrowing cost at 7.11 percent, above the 7 percent danger level that pushed Greece Ireland and Portugal into seeking external aid and still 50 bps higher than at the beginning of last week.

Spain and Italy will be closely watched in the run-up to their first debt auctions of the year, with little sign investors have started 2012 any keener to buy the countries’ bonds than they were in 2011.

“The main focus is still the Italian and Spanish supply. While we’ve got that lurking over us I think the market is likely to still be a little bit wary,” said Eric Wand, strategist at Lloyds Bank in London.

Markets had low expectations a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy would ease concerns. The leaders will discuss the final details of a deal to increase fiscal coordination in the euro zone.