Bloomberg News

Greek Government Bonds Drop as Ratings Cut Fuels Default Bets

June 14, 2011

June 14 (Bloomberg) -- Greek government bonds slumped, leading the securities of Europe’s most indebted nations lower, after Standard & Poor’s gave the country the world’s lowest credit rating amid speculation it’s moving closer to a default.

The losses pushed the extra yield, or spread, that investors demand to hold the country’s 10-year bonds instead of similar maturity German bunds to a record. Declines drove up Portuguese 10- and two-year yields to the highest since the euro’s debut. German bunds slid for the first time in four days as stocks rose, snapping gains that pushed the yield to its lowest level in five months yesterday.

“Markets are fearing that a Greek default will become a reality,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. “If it’s not the Greek topic, then it’s always stock markets at the moment. It’s just a question of whether we want to take risk or not.”

The Greek two-year yield increased 28 basis points to 26.42 percent as of 4:33 p.m. in London. The 10-year yield rose for a sixth day, increasing 40 basis points to 17.38 percent. The Portuguese 10-year yield climbed six basis points to 10.73 percent. The two-year yield rose 21 basis points to 12.08 percent, after being as high as 12.20 percent.

Portugal faces the repayment of 4.9 billion euros ($7 billion) of a 5.15 percent bond maturing tomorrow.

Ministers Meeting

The European Financial Stability Facility started gauging investor interest for its 5 billion-euro bond sale to raise money for Portugal’s aid program, according to two people with knowledge of the sale. The AAA rated fund overseen by euro-area countries is issuing 10-year notes in its second sale, EFSF said in a June 10 statement.

The spread between Greek 10-year bonds and benchmark German debt widened to 1,446 basis points, the most since the euro was introduced in 1999. Portuguese 10-year bonds yielded 771 basis points more than bunds.

European finance chiefs are meeting in Brussels today, in an effort to narrow differences on how investors share the cost of easing the region’s biggest debt burden. They aim to wrap up a new financing plan at a leaders’ summit on June 23-24 and prevent the euro area’s first sovereign default.

Greece sold 1.625 billion euros of 182-day Treasury bills at a yield of 4.96 percent. Investors bid for 2.58 times the amount of securities offered, compared with a bid-to-cover of 3.58 at the previous sale of similar-maturity securities held May 10, which were allotted at 4.88 percent.

CDS Costs

S&P cut Greece’s rating yesterday to CCC from B, reflecting “our view that there is a significantly higher likelihood of one or more defaults,” it said in a statement.

Costs to insure Greek, Irish and Portuguese debt against default reached all-time highs, according to traders of credit- default swaps. Greece climbed 12 basis points to 1,622 basis points, Ireland increased 3 to 743 and Portugal was 5 higher at 767, according to CMA.

Greek government debt has lost investors 16 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German bonds returned 0.5 percent while Treasuries made 3.2 percent.

The 10-year German bund yield rose six basis points to 3.01 percent. It reached 2.94 percent yesterday, the lowest since Jan. 12. The 3.25 percent security due July 2021 fell 0.485, or 4.85 euros per 1,000-euro face amount, to 102.005. Yields on two-year notes added five basis points to 1.59 percent. They dropped to 1.51 percent yesterday, the least since March 17.

Germany is scheduled to sell an additional 6 billion euros of two-year notes tomorrow, while Portugal plans to auction 98- and 189-day Treasury bills.

Stocks Gain

The Stoxx Europe 600 Index gained 0.8 percent, while the MSCI Asia Pacific Index of shares rose 1 percent, as reports showed China’s inflation accelerated to the fastest pace in almost three years in May and industrial production rose more than estimated.

Italian five-year bonds advanced after the nation sold 3.5 billion euros of 3.75 percent notes maturing in April 2016. The yield slipped three basis points to 3.97 percent. Investors bid for 1.28 times the amount of debt on sale, compared with a so- called bid-to-cover ratio of 1.45 at the previous auction of the same securities held May 13.

“This is not a stellar auction, but Italy managed to sell the maximum of the amount announced,” said Chiara Cremonesi, a fixed income strategist at UniCredit SpA in London. “As the debate on Greece is going on, the mood in the market is very fragile and quite uncertain. The timing of the auction is awkward.”

--With assistance Ben Martin, Jennifer Ryan and Abigail Moses in London and James Hertling in Paris. Editors: Mark McCord, Keith Campbell

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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


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