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Rates market shifts nervously ahead of key EU meeting

Government bond traders say the market needs certainty from the March 11 meeting, but fear it is unlikely to be forthcoming

Uncertainty and anxiety have returned to the European government bond markets as investors and intermediaries question if they have run ahead of themselves by assuming that political commitment to the euro project will be strong enough to drive a grand bargain for Germany to support the weaker eurozone countries. Will that support mean no loss of principal for those who hold European government bonds to maturity? Or will it rather allow sovereign defaults while seeking to prevent them developing into a system-wide financial panic?

“We need Europe to deliver what the market is now pricing in,” says Renos Dimitriou, head of European government bond trading at RBS in London, “which is, at the least, an extension of the size and scope of the EFSF [European Financial Stability Facility] and the ESM [European Stability Mechanism] and perhaps less-onerous terms for recipients as a signal of moves to greater fiscal unity.”

Dimitriou adds: “Even though the risk of government defaults is not zero, that would leave investors feeling much more secure of getting par back.”

He concludes hopefully: “I feel that the bond markets are giving policymakers time to improve the bailout facilities. If the reforms are aggressive and point to more preventative measures to aid Spain, for example, then we’ve put the peak of the fears about a worst case behind us.”

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