Bloomberg News

Bunds Decline Amid Greek Debt Optimism; Spanish Bonds Rebound

June 02, 2011

June 2 (Bloomberg) -- German government bonds fell as optimism that a solution may be reached to stop the spread of Europe’s debt crisis outweighed concern Greece will default after Moody’s Investors Service lowered its debt rating.

The German bund yield rebounded from the lowest since January after European Central Bank President Jean-Claude Trichet said governments should consider setting up a finance ministry for the 17-nation currency region. Spanish debt rose after the nation auctioned 4 billion euros ($5.8 billion) of three- and four-year notes, meeting the maximum target.

“We are moving towards some sort of temporary resolution on the Greek situation and the Spanish bond auction went fairly well and that provided some relief in the market,” said John Davies, a fixed-income strategist at WestLB AG in London. “With the 10-year bund yield at 3 percent, it can’t go down that much more given that the ECB is still likely to hike” rates.

The 10-year bund yield gained one basis point to 3 percent, after earlier sliding to 2.96 percent, the lowest since Jan. 12. The 3.25 percent security due July 2021 slipped 0.085, or 85 euro cents per 1,000-euro face amount, to 102.160. The yield on German two-year notes rose two basis points to 1.63 percent. It slumped to 1.56 percent on May 30, the least in 10 weeks.

Greek 10-year bond yields were 10 basis points higher at 16.26 percent. Moody’s yesterday downgraded Greece’s rating to Caa1 from B1, putting it on a par with Cuba, and said the nation’s default risk was raised to 50 percent.

Greek Aid Measures

The move came as policy makers narrowed in on bond rollovers as a pillar of any new aid package. Investors may be given preferred status, higher coupon payments or collateral as incentives, said two European Union officials familiar with the situation.

The debt-stricken nation, which faces a funding gap of 30 billion euros of bonds next year, has seen its 10-year yield surge more than 340 basis points since the start of April.

Spain’s bonds advanced as it sold 4 billion euros of three- year and four-year securities, meeting the maximum target the Treasury had set for the sale.

Investors bid for 2.49 times the amount of 2014 securities on offer, up from a so-called bid-to-cover ratio of 1.79 at an auction in April, and 2.90 times the amount of securities due 2015, from 1.63 at a sale in September. The average yield on the three-year note was 4.037 percent, while the four-year security attracted an average yield of 4.23 percent.

Irish, Portuguese Debt

“It seems to have gone reasonably well with the authorities managing to get the upper end of their targeted level away,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Ltd. in Edinburgh. “Investors are clearly demanding a higher risk premium on Spanish government bonds than they have done previously but the fact that they are able to raise the upper end of their targeted level is reassuring.”

Spain’s 10-year yield slid three basis points to 5.29 percent, while the two-year yield declined six basis points to 3.43 percent. Portuguese debt also rose with the 10-year yield slipping one basis point to 9.72 percent, while the yield on similar maturity Irish debt gained two basis points to 11 percent.

Bunds earlier advanced amid concern that data today will show jobs growth in the U.S. is struggling to gain momentum.

Jobless Claims

Initial jobless claims fell to 417,000 from 424 the prior week, according to the median estimate of 50 economists surveyed by Bloomberg News before today’s report. U.S. employment increased by 38,000 last month, the smallest increase since September, from a revised 177,000 in April, according to figures from ADP Employer Services yesterday. The median estimate in the Bloomberg News survey anticipated a 175,000 advance for May.

“An important driver for bunds has been the bad U.S. data, which lent support to bunds, so today’s initial U.S. jobless claims will be important,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London.

German government bonds have handed investors 0.2 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned 3.2 percent. Greek bonds have lost 12.5 percent so far this year and Portuguese debt 14.5 percent, the data show.

--Editors: Mark McCord, Peter Branton

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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