* Bunds hover near record highs as Greek swap looms * Italian, Spanish yields rise on participation worries * Germany to sell 4 bln euros of 5-year bonds LONDON, March 7 (Reuters) - German government bond futures held near record highs on Wednesday and may retest them with markets nervous as Greece runs the risk of a chaotic debt default if it does not get sufficient support this week for a debt restructuring. The worries kept pressure on the euro zone's peripheral issuers with Italian and Spanish bond yields extending their rise above 5.0 percent although traders said volumes were limited in the run-up to the deadline. Greece's private creditors have until Thursday night to say whether they will participate in the exchange that is a key part of a bailout programme to enable Greece to meet a debt repayment on March 20. The risk that voluntary participation in the deal is too low even to allow the use of collective action clauses to corral the remainder of bondholders is likely to ensure Bunds don't stray too far. "Certainly we're going to hover around the highs ... and it's entirely possible we forge new ones," said Rabobank rate strategist Richard McGuire. "It's going to be dependent on the vagaries of the headlines as they roll out ahead of the Greek deal. Any signs of snags and we could retest the highs." March Bund futures, which expire on Thursday, were 2 ticks higher at 140.29 having hit a record high of 140.48 on Tuesday, with the June contract at 138.59. "People are nervous and the way Bunds are trading - very well - it looks like people are long of risk but not long of Bunds so it's most likely more buying on dips," a trader said. Ten-year yields were flat at 1.78 percent. Even if Greece completes its debt swap without incident, financial markets are unlikely to settle down for long with concerns over slowing growth in the peripheral countries and budgetary slippage in Spain threatening to curtail attempts to cut debt levels. "We doubt (the debt swap) will be a disaster that leads to a disorderly default," said Standard Bank analysts Steven Barrow. "However, our sense is that this week's rise in risk aversion may well persist even if the outcome in Greece is not as bad as some fear." Spanish 10-year bonds underperformed with yields 7.5 basis points higher at 5.24 percent and the Italian equivalent up 3.5 basis points at 5.42 percent. Germany will sell 4.0 billion euros of 5-year bonds with the auction expected to see decent demand given the safe-haven status of the paper, abundant liquidity in the banking system and 19 billion euros of repayments to investors next week. "The last Bund auction saw a transition from blow-out demand to merely good," Credit Agricole strategists said. "The auction today should be reasonably bid, on the back of (the) liquidity and the issue in question is no longer expensive." Although 5-year yields fell close to their January lows on Wednesday, Commerzbank notes that the bond offers around a 60 basis point pick-up over two-year paper and looks attractive relative to other 5-year German bonds. One thing that may signal some looming pressure for Bunds is the release of the ADP U.S. private sector employment data at 1315 GMT. Recent data has suggested the U.S. economy is picking up steam, capping gains in U.S. Treasury markets and while Greece will be the immediate focus for euro zone markets, the ADP report is seen as a precursor to Friday's U.S. non-farm payrolls report. "ADP may have a limited impact today as Greece is going to stay the dominant force but then we'll wake up on Friday looking into the whites of the eyes of payrolls," said Rabobank's McGuire.

Source