Bloomberg News

Greek Government Bonds Drop as Bailout Talks Stall; Bunds Rise

June 15, 2011

June 15 (Bloomberg) -- Greek government bonds led declines by securities from Europe’s most indebted countries as the region’s finance ministers failed to reach agreement on another financial rescue for the nation while avoiding a default.

Losses pushed two- and 10-year Greek yields to the highest since the euro was introduced in 1999, while yields on Irish 10- year bonds and Portuguese two-year securities also reached records. Talks may drag into July, Luxembourg’s Finance Minister Luc Frieden said after an emergency session of finance chiefs in Brussels yesterday ended with no deal. German bonds gained even as demand declined at a sale of two-year notes and data showed European industrial production unexpectedly rose in April.

“The concerns about Greece are stressing the market” for so-called peripheral bonds, said Norbert Aul, a strategist at Royal Bank of Canada in London. “There’s still uncertainty with respect to Greece.”

Greek 10-year bond yields increased 41 basis points to 17.79 percent as of 4:23 p.m. in London. The yield difference, or spread, versus benchmark German bunds widened to a euro-era record 1,494 basis points, or 14.94 percentage points. Greek two-year notes fell for a seventh straight day, driving the yield as much as 173 basis points higher to 28.15 percent.

Irish 10-year yields rose 11 basis points to 11.49 percent, posting a seventh consecutive gain. The Portuguese two-year yield jumped 37 basis points to 12.45 percent.

German, EFSF Auctions

Germany’s two-year notes, perceived to be the region’s safest securities, gained as the government sold an additional 4.95 billion euros ($7 billion) of the maturity. Investors bid for 1.4 times the amount on offer, down from a so-called bid-to- cover ratio of 1.9 times in May.

Portugal’s borrowing costs dropped at a sale of bills today. The securities due in December were issued at an average yield of 4.954 percent, the country’s debt management agency said. That compares with an average yield of 5.529 percent at a previous auction of six-month bills on April 20. Demand exceeded the amount on offer by 3.8 times, compared with 3.7 in April.

The European Financial Stability Facility, the AAA-rated bailout fund, sold 5 billion euros of 10-year notes at a yield of 3.49 percent as part of the financial assistance package to Portugal. The funds will be disbursed to Portugal on June 22, the EFSF said in a statement.

Spanish bonds declined relative to bunds, pushing the 10- year spread 13 basis points wider to 258 basis points, before sales of bonds maturing in 2019 and 2026 tomorrow. The yield on the country’s 10-year bond increased eight basis points to 5.55 percent.

“Spain is underperforming,” RBC’s Aul said. “It’s a combination of concession-building ahead of tomorrow’s supply, difficult maturities -- 15 years is always difficult -- and ongoing discussions on Greece.”

Bund Returns

The German 10-year bund yield declined four basis points to 2.97 percent. It reached 2.94 percent on June 13, the lowest level since Jan. 12. The 3.25 percent security due July 2021 rose 0.35, or 3.5 euros per 1,000-euro face amount, to 102.35. Yields on two-year notes were seven basis points lower at 1.52 percent. They dropped to 1.51 percent on June 13, the lowest since March 17.

German government bonds have returned 0.1 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries made 2.6 percent. Greek securities handed investors a 16 percent loss while Portuguese debt fell 17 percent, the indexes show.

Industrial production in the nations that share the euro rose 0.2 percent in April, after no growth a month earlier, the European Union’s statistics office in Luxembourg said today. The median estimate of 36 economists surveyed by Bloomberg News was for a decline of 0.2 percent.

Greek Protests

There is a “likelihood” that the central bank will boost interest rates in July, European Central Bank President Jean- Claude Trichet said this week. While a move is “not certain,” it was “possible,” Trichet said in an interview two days ago with CNN, according to the network’s transcript.

Protesters gathered outside the Greek parliament today as lawmakers began to debate budget cuts and asset sales. German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet in two days in Berlin to resolve their differences over the terms of a new rescue plan for Greece.

“Any bickering over the solution means any advance on this issue will probably take longer than expected,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan.

Standard & Poor’s slapped Greece with the world’s lowest credit rating on June 13 and the European Central Bank and Germany clashed over easing the Mediterranean nation’s debt load. European finance ministers agreed to convene again on June 19. Germany has proposed that maturities on Greek debt be extended for seven years, which rating companies have said would amount to a default. Trichet said on June 9 that governments were flirting with what could be a “enormous mistake.”

The cost of insuring against default on Greek, Irish and Portuguese government debt surged to records, according to traders of credit-default swaps. Greece soared 118 basis points to 1,723 basis points, Portugal climbed 22 to 776 and Ireland rose 22 to 750, according to CMA prices.

--With assistance from Natalie Weeks in Athens, Alan Crawford and Rainer Buergin in Brussels and Abigail Moses in London. Editors: Keith Campbell, Mark McCord.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at; Keith Jenkins in London at

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

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