Bloomberg News

Greek, Portuguese, Irish Bonds Decline Amid Bailout Concern

June 10, 2011

June 10 (Bloomberg) -- Portugal’s 10-year bond yield rose to a record, leading a surge in the borrowing costs of Europe’s most indebted nations, as policy makers clashed over a solution to the region’s funding crisis.

German debt rose as consumer-price inflation eased in May and equities declined, boosting demand for safety. Greek, Irish and Spanish benchmark bonds slumped after German Finance Minister Wolfgang Schaeuble stepped up his calls for bondholders to assume a “fair” share of further Greek aid, pitting him against the European Central Bank, whose President Jean-Claude Trichet yesterday rejected any direct participation in a second bailout of the debt-stricken nation.

“The ECB and the German government are on a collision course and that was reinforced by Trichet yesterday,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There’s no common denominator in place.”

The Portuguese 10-year yield rose 15 basis points to 10.44 percent, as of 4:54 p.m. in London. It earlier climbed to a record 10.45 percent. The 3.85 percent security due in April 2021 slipped 0.635, or 6.35 euros per 1,000-euro ($1,446) face amount, to 60.64.

The additional yield investors demand to hold the securities instead of benchmark German bunds widened to as much as 745 basis points, the most since at least 1997, when Bloomberg began collecting the data.

Germany, ECB Clash

In a speech to lawmakers in Berlin, Schaeuble appealed for backing for a second bailout of Greece to ensure a stable euro and bolster the global economy. In return, “we have to insist on the participation of the private sector,” he said.

Trichet yesterday rejected any direct ECB participation in a second bailout for Greece. As politicians try to find a plan by June 24 that would share the cost of a new rescue with bondholders, he ruled out the ECB setting an example with its own assets, saying the bank has no intention of rolling over its own Greek holdings.

Trichet also warned against an approach advocated by Schaeuble that would pressure investors to accept longer maturities on their Greek bonds, saying any solution forcing private-sector involvement amounts to a “credit event” and would be an “enormous mistake” for the euro region.

ECB Vice President Vitor Constancio said it’s not up to the central bank to solve Greece’s debt crisis.

“The burden is not on us,” Constancio told reporters at a conference in Frankfurt today. “In the first instance it should be the concern of governments and treasuries. It wasn’t the ECB that asked for private-sector involvement.”

Credit-Default Swaps

Greece’s government notes were little changed, with the two-year yield two basis points lower at 25.74 percent. The 10- year yield rose six basis points to 16.71 percent.

The cost of insuring against default on government debt sold by Greece surged to a record, according to traders of credit-default swaps. Contracts on Greece soared to 1,534, according to CMA.

The benchmark German bund yield dropped seven basis points to 2.95 percent. Yields on two-year notes were also seven basis points lower, at 1.54 percent, the least since March 17.

The harmonized inflation rate in Europe’s largest economy slipped to 2.4 percent from 2.7 percent in April, according to the Federal Statistics Office in Wiesbaden. German bonds rallied yesterday after the ECB revised expectations for 2012 inflation downwards, leading investors to trim bets on the pace of interest-rate increases, even after the bank signaled higher borrowing costs next month.

Disappointed Bears

“For the bund bears it was disappointing that the inflation forecast for 2012 was unchanged, so market participants maybe expect a pause in the ECB rate-hike cycle,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen-Thueringen in Frankfurt. “Inflation for Germany as well as for the euro region and producer prices came down from high levels and maybe that’s an additional point helping bunds.”

Euribor futures rose, pushing the implied yield on the contract expiring in March 2012 down five basis points to 1.92 percent, indicating fewer bets on higher ECB interest rates.

German government bonds have handed investors less than 0.1 percent this year, while U.S. Treasuries have returned 3.1 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The Standard & Poor’s 500 Index declined 1.2 percent and the Stoxx Europe 600 Index dropped 1.3 percent.

‘Big Supply Week’

Spain’s 10-year bonds fell, pushing the yield up four basis points to 5.48 percent. It earlier rose to 5.52 percent, the most since May 24. The Spanish government plans to auction debt due in 2026 on June 16. Germany, France and Italy will also sell bonds next week.

It “will be a big supply week, a record high for 2011 in terms of issuance,” said Schnautz. “In this environment having Spain coming up with long bonds is a burden. For Spain the negative news flow does not stop.”

The Irish 10-year bond yield jumped as much as 16 basis points to 11.25 percent after touching a euro-era record of 11.35 percent, widening the spread over German bunds of a similar maturity to as much as 834 basis points, the most since at least 1992 when Bloomberg began collecting the data.

Italian debt was little changed after the nation sold 6 billion euros of 366-day Treasury bills at an average yield of 2.147 percent.

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Lucy Meakin in London at

To contact the editor responsible for this story: Daniel Tilles at

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