Bunds hold near highs after downgrades

Euro zone government bonds held near highs hit the previous session on Wednesday after rating downgrades of Greece and Portugal raised fears euro zone debt problems are spreading, causing a wide repricing of sovereign credit risk.

Standard & Poor's cut Greece's sovereign credit ratings to "junk" status on Tuesday and downgraded Portugal's ratings to A-minus, leading to a further rise in euro zone peripheral bond yields. [ID:nLDE63P0LU]

Two-year German government bond yields fell to record lows, while the euro tumbled to a one-year low versus the dollar <EUR=>.

"There's going to be more contagion, more EMU break-up talk but perhaps policymakers will finally realise the seriousness of the situation," said one trader.

At 0606 GMT, June Bund futures <FGBLM0> were 46 ticks higher from Wednesday's settlement close at 125.10, having hit their highest since March 2009 in after-hours trade on Wednesday.

Two-year bond yields <EU2YT=RR> were 1.5 basis points higher at 0.805 percent, with 10-year yields up 3 basis points at 2.955 percent.

Traders said there was unlikely to be any trade in peripheral bonds, with the market seized up and bid/offer spreads soaring.

ECB-President Jean-Claude Trichet and IMF Managing Director Dominique Strauss-Kahn will brief German parliamentary groups on the Greek rescue plan on Wednesday.

European Union President Herman Van Rompuy said on Wednesday that negotiations on Greece's debt were well on track, and there was no question of restructuring it [nTKX006780].

In supply, Germany will sell up to 6 billion euros of new 2020 Bunds, which analysts expect to benefit from current demand for safe-haven core paper.