Bloomberg News

Greek Bonds Sink, CDS Jump to Record as Default Concern Mounts

June 16, 2011

June 16 (Bloomberg) -- Greek government bonds slumped, pushing the yield on the two-year note above 30 percent for the first time, as Prime Minister George Papandreou’s failure to win support for more austerity fueled speculation of a default.

Portuguese and Irish two-year yields also climbed to the most since the euro’s 1999 debut, while the 10-year Spanish yield jumped to the highest since 2000 as the country’s borrowing costs rose at a debt sale. The cost of insuring against default on Greek, Irish and Portuguese government debt surged to records. Papandreou will reshuffle his Cabinet and seek a confidence vote today. German government bonds gained, pushing the 10-year yield to a five-month low.

“The Greek drama is firmly catching everything under its wings and there’s no way around that story,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Implementation risk is highly elevated. It’s completely risk- off mode and for a country like Spain to come to the market in this environment, it’s challenging.”

The yield on Greece’s two-year notes jumped 128 basis points to 29.30 percent as of 4:35 p.m. in London, after being as high as 30.32 percent. Ireland’s two-year yield increased 86 basis points to 12.96 percent. The Portuguese two-year yield surged 58 basis points to 13.02 percent.

Greek government bonds have lost investors 19 percent this year, while Portuguese debt declined 17 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German debt, perceived to be the safest in the region, returned 0.5 percent, while Treasuries made 3.2 percent, the indexes show.

Confidence Vote

Papandreou needs a parliamentary vote on a 78 billion-euro ($110 billion) five-year package of budget cuts and asset sales by next month to ensure the country receives a new EU aid package to avoid the euro-area’s first default. Standard & Poor’s slashed Greece’s credit earlier this week to CCC from B, handing it the world’s lowest sovereign credit rating.

Gains by German bonds pushed the 10-year yield down by as much as five basis points to 2.91 percent, the lowest since Jan. 11. The 3.25 percent security due July 2021 rose 0.260, or 2.60 euros per 1,000-euro face amount, to 102.795. Yields on two-year notes fell six basis points to 1.45 percent.

Athens Protest

More than 20,000 people protested yesterday in Athens against wage reductions and tax increases as lawmakers debated budget cuts and asset sales that are conditions of the new aid. Ports, banks, hospitals and state-run companies were paralyzed by strikes and police used tear gas to disperse crowds. Greece’s unemployment rate rose to a record in the first quarter, the Hellenic Statistical Service said today.

Papandreou told his party lawmakers today that his government had a duty to push ahead with reforms.

“I ask all Greeks to reject the logic that someone else is at fault,” he said at a meeting in Athens today. “This will lead to inaction and to a dependence on our creditors, which we have now. It is in our hands to decide to continue this effort.”

Spanish 10-year bonds yielded 273 basis points more than similar-maturity bunds, the most since Dec. 1. The spread has widened more than 100 basis points since declining to its 2010 low on April 12. The Irish spread over bunds jumped to 864 basis points, after reaching the most since the euro’s debut, while Portugal’s securities yielded 800 points more than their German peers for the first time, before settling at 798 basis points.

Spanish Auction

French bonds also declined relative to bunds, pushing the spread over their German counterparts to 42 basis points, the most since January. The yield spread between Austrian and German 10-year securities widened by four basis points to 51 basis points, also the most in five months.

Spain sold 2.84 billion euros of bonds, missing the maximum target. The Treasury in Madrid said it sold 1.51 billion euros of 15-year bonds at an average yield of 6.027 percent, compared with 6.068 percent on the secondary market before the sale and 5.953 percent when similar-maturity bonds were sold on Dec. 16. Spain also sold 1.33 billion euros of eight-year debt at an average yield of 5.352 percent.

“The results were merely okay, not a ringing success,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole CIB in London, wrote in an e-mailed note.

Credit-default swaps on Greece soared 280 basis points to 2,050, while those on Ireland rose 36 to 802 and Portugal climbed 17 to 814, according to CMA prices. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 14 basis points to a record 239.5. An increase signals worsening perceptions of credit quality.

--With assistance from Maria Petrakis and Natalie Weeks in Athens, Lucy Meakin and Abigail Moses in London. Editors: Keith Campbell, Mark McCord.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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