Bloomberg News

Greek Bonds Slide on Aid Delay; Italian Debt Falls on Moody’s

June 20, 2011

June 20 (Bloomberg) -- Greek 10-year government bonds led declines by securities from Europe’s most indebted nations after governments failed to agree on releasing a loan payment, fueling speculation the country may default.

The extra yield investors demand to hold Italian debt instead of benchmark German bunds widened after Moody’s Investors Service said the Mediterranean nation’s credit ratings may be cut. German bonds pared an earlier gain that pushed the 10-year yield to within one basis point of the lowest in more than five months, as euro-area ministers put off deciding whether to give Greece the full 12 billion euros ($17.1 billion) promised for July.

“Decision-making regarding Greece is what’s driving the market and giving it a bit of volatility and uncertainty,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich.

Greek 10-year bond yields climbed 40 basis points to 17.34 percent at 4:57 p.m. in London. Two-year yields, which surpassed 30 percent for the first time last week, fell 18 basis points to 28.61 percent. The 30-year yield rose for a 10th consecutive day, the longest streak since January 2009.

Portuguese 10-year yields rose 24 basis points to 11.15 percent. Equivalent-maturity Italian yields climbed three basis points to 4.85 percent after being as high as 4.88 percent. The yield jumped to 4.94 percent at the end of last week, the most since March 11.

The 10-year Treasury yield approached the lowest this year and the euro declined by as much as 0.8 percent against the dollar as investors sought the relative safety of U.S. assets.

Moody’s Warning

Italy’s Aa2 local and foreign-currency government bond ratings were placed under review for a possible downgrade, Moody’s said on June 17 in a statement released after European markets closed. The country faces “long-term structural impediments to growth,” while “fragile market sentiment” in the region poses risks, Moody’s said.

The spread between 10-year Italian bonds and German bunds widened to 190 basis points after reaching 204 basis points on June 16, the most since Jan. 11. Portugal’s 10-year spread over bunds climbed 26 basis points to a euro-era record 821 basis points. Irish 10-year securities yielded 853 basis points more than bunds, up from 843 basis points on June 17.

Spanish 10-year yields were one basis point higher at 5.58 percent, leaving the spread over German bunds three basis points wider at 263 basis points.

Crisis Meeting

Greek and Portuguese securities have both lost 19 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German bonds made a 0.4 percent return as investors sought the region’s safest debt, the indexes show. They still underperformed Treasuries, which handed investors 3.3 percent.

The bonds of the high-deficit nations snapped gains that pushed the Greek 10-year yield down by more than 100 basis points on June 17, after German Chancellor Angela Merkel dropped calls for a mandatory bond exchange that might lead credit- rating companies to declare Greece in default.

Ministers at a euro-crisis meeting in Luxembourg “forcefully reminded the Greek government” to fulfill its commitments, Luxembourg Prime Minister Jean-Claude Juncker told reporters early today. Decisions on the next payout and a three- year follow-up package were put off until early July.

“There’s still a whole stack of event risks ahead,” said Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London. “The biggest issue is the volatility. It’s discouraging some investors from the market.”

Greek Bond Trading

Greek government bond trading on the electronic secondary securities market known as HDAT dropped 50 percent in May from the previous month, the central bank said.

Traded volume fell to 695 million euros from 1.4 billion euros in the previous month, and 1.39 billion euros in the same period a year earlier, the Bank of Greece said today in a statement sent by e-mail.

The 10-year bund yield dropped one basis point to 2.95 percent, after dropping earlier to 2.907 percent. It declined to 2.905 percent on June 16, the least since Jan. 11. The 3.25 percent security due in July 2021 rose 0.075, or 75 euro cents per 1,000-euro face amount, to 102.55

Yields on two-year notes were also one basis point lower, at 1.51 percent. They dropped to 1.43 percent on June 16, the lowest since Feb. 22.

--With assistance from Paul Dobson in London, James G. Neuger and Stephanie Bodoni in Luxembourg and Timothy R. Homan in Washington. Editors: Matthew Brown, 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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