Bloomberg News

Irish Yields Reach Record on Greek Contagion; German Bunds Fall

June 27, 2011

June 27 (Bloomberg) -- Irish and Portuguese government bond yields rose to records amid concern that a deal to provide extra aid for Greece will not be enough to prevent the debt crisis from spreading to other euro-region nations.

German 10-year bonds slid, pushing up yields from this year’s lows, on signs European banks are prepared to contribute to efforts to stave off a Greek default. Spanish and Italian securities outperformed benchmark bunds before Italy sells up to 8 billion euros ($11 billion) of bonds tomorrow.

The Greek crisis is “still very volatile and erratic and it remains to be seen what the details of a deal will be,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “There are hopes that a deal between banks and governments will be reached on a Greek debt rollover; that’s causing a bit of relief.”

The yield on Irish 10-year bonds rose 13 basis points to 12.10 percent as of 4:52 p.m. in London after reaching a record 12.11 percent. The 5 percent securities maturing in October 2020 fell 0.50, or 5 euros per 1,000-euro face amount, to 61.565. Equivalent-maturity Portuguese bond yields jumped 30 basis points to 11.68 percent.

The yield difference between Greek and Portuguese 10-year bonds narrowed to 512 basis points, the least since April 15.

Rollover Agreement

The yield on benchmark German bunds was six basis points higher at 2.89 percent. Spanish 10-year yields increased one basis point to 5.69 percent and the rate on similar-maturity Italian debt was little changed at 4.98 percent.

The decline in German bunds trimmed their monthly advance. Still, yields have fallen more than 45 basis points this quarter as concern that Greece will become the first euro-region nation to default roiled financial markets, boosting demand for the region’s safest assets.

French banks are headed toward an agreement to roll over 70 percent of their holdings of Greek debt between now and 2014, President Nicolas Sarkozy said today. Germany’s biggest banks and insurers are weighing the same proposal, a person familiar with the matter said.

German and French lenders are the biggest European holders of Greek debt and their participation in the plan is key to achieving a European Union goal to get banks to roll over at least 30 billion euros of bonds. The rollover is part of an aid package that EU leaders have pledged to pass next month to prevent the euro-region’s first default a year after the 110 billion-euro Greek bailout that failed to stop the debt crisis.

Greek Debate

Greek two-year yields were 108 basis points higher at 29.38 percent, while 10-year yields were three basis points higher at 16.81 percent as lawmakers embarked on a three-day debate on austerity plans amid protests in Athens.

The nation’s two-year note yields have climbed more than 17 percentage points since the start of this year as traders added to bets the nation will default on its debts. Irish two-year note yields rose above 14 percent for the first time today, and the yield on equivalent-maturity Portuguese notes jumped 34 basis points to 14.63 percent.

German Finance Minister Wolfgang Schaeuble said a rejection of Greek Prime Minister George Papandreou’s budget plan could result in the country foregoing its next loan under a European bailout, according to an interview today in Bild am Sonntag. Alexandros Athanasiadis, a lawmaker of Greece’s ruling Pasok party, said he’s likely to oppose Papandreou’s package this week after meeting today with Finance Minister Evangelos Venizelos.

Austerity Vote

“The Greek vote will increase nervousness,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “Even if the Greek parliament doesn’t vote in favor of the austerity measures, the European Union will probably still pay out some of the aid tranche but things will get uglier.”

German Deputy Finance Minister Joerg Asmussen said he expects the Greek parliament to pass the package of extra measures this week and Chinese Premier Wen Jiabao said his nation will keep investing in Europe’s sovereign bond market.

Billionaire investor George Soros said it’s “probably inevitable” that a mechanism will be put in place to allow weaker economies to exit the euro and The Bank for International Settlements urged Europe to find a permanent solution to the debt crisis.

German government bonds have handed investors 1.1 percent this year, while Treasuries returned 3.8 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian notes made 0.9 percent while Greece delivered a loss of 19 percent.

--Editors: Mark McCord, Matthew Brown

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net.

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


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