Bloomberg News

Portuguese, Irish Bonds Fall on Debt-Crisis; German Bunds Drop

June 07, 2011

June 7 (Bloomberg) -- Portuguese and Irish 10-year bonds fell amid concern over the ability of euro-region policy makers to stem the 17-nation bloc’s debt crisis and stave off a sovereign default.

Ten-year German bunds declined as stocks rose. Portugal’s 10-year yields rose to a record as investors awaited the formation of a coalition government. German Chancellor Angela Merkel said the region will overcome its fiscal troubles, while European Central Bank President Jean-Claude Trichet signaled he may support a plan for rolling over Greek debt.

“The market still thinks the whole situation is a mess and still thinks some kind of restructuring in Greece is unavoidable,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “What everyone needs is action and growth. The new Portuguese government will have to enact an even more stringent austerity plan.”

Portuguese 10-year yields gained 23 basis points to a record 9.97 percent as of 4:03 p.m. in London. The 3.85 percent security due in April 2021 fell 1.075, or 10.75 euros per 1,000- euro ($1,463) face amount, to 62.69. The nation’s two-year note yields advanced 11 basis points to 10.90 percent.

Irish 10-year yields climbed 10 basis points to 10.77 percent, while similar-maturity Greek yields added two basis points to 15.86 percent.

Private Sector

Greece is set to receive the next installment of aid from the European Union and International Monetary Fund bailout plan and may also receive additional aid in a deal that Luxembourg Prime Minister Jean-Claude Juncker said included a “voluntary” role for investors.

While Trichet said he’s against imposing losses on creditors, he indicated he’d approve of financial institutions maintaining their level of outstanding credit. “That is not a default,” he said at an event in Montreal late yesterday. “That is something the ECB would consider appropriate.”

The ECB is considering a rollover of bonds as an alternative means of easing Greece’s funding squeeze, two officials familiar with the matter said last week on condition of anonymity.

“Trichet’s comments were the first hint from him that he could also imagine that the private sector helps out in a very muted way,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “It’s a shift from his previous standpoints.”

The European Central Bank meets on June 9 and is forecast to leave its benchmark rate at 1.25 percent, according to all 52 economists in a Bloomberg survey. The Frankfurt-based central bank, led by Trichet, may increase borrowing costs by 25 basis points in July, a separate survey showed.

Retail Sales

The 10-year bund yield climbed four basis points to 3.06 percent. It slid to 2.96 percent on June 3, the lowest since Jan. 12. The yield on German two-year notes was little changed at 1.67 percent.

Euro-area retail sales jumped 0.9 percent from March, when they dropped 0.9 percent, Eurostat, the European Union’s statistics office in Luxembourg, said today. That’s the biggest gain since March 2010 and compares with the 0.3 percent median estimate of 22 economists surveyed by Bloomberg News.

The benchmark Stoxx Europe 600 Index advanced 0.2 percent.

Merkel told President Barack Obama the euro region will “emerge strengthened” from the crisis, Steffen Seibert, the chancellor’s chief spokesman, said after the leaders met in Washington yesterday. The pair discussed the topic over dinner, including steps Europe is taking to combat the crisis, Seibert said in an interview on Germany’s ARD television.

Coalition Talks

Pedro Passos Coelho, Portugal’s incoming prime minister, was told by President Anibal Cavaco Silva to start talks immediately on forging a coalition to ensure austerity measures mandated by a 78 billion-euro bailout stay on track.

The new government “should be seen as good news and the fact that the yield is going up means that the market is questioning it,” Steven Major, global head of fixed income research at HSBC Holdings Plc said on Bloomberg Television’s “On the Move” with Francine Lacqua. “The market is just concerned about what the first actions will be of this new government.”

Austria sold 880 million euros of bonds maturing in 2022 at an average yield of 3.48 percent and the same amount of debt due in 2037 at 4.01 percent.

German government bonds have returned investors less than 1 percent this year while U.S. Treasuries have gained 3 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds have lost 11 percent and Portugal’s have handed investors a 14 percent drop in value, the indexes show.

--Editors: Matthew Brown, Mark McCord

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

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


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