Bloomberg News

Greek Bonds Rise on Bailout Bets; German Notes Fall on Trichet

June 28, 2011

June 28 (Bloomberg) -- Greek bonds rose the most in more than a week on speculation that lawmakers will approve a set of austerity measures tomorrow, moving the country closer to receiving additional international bailout funding.

Spanish and Portuguese 10-year debt also advanced. German two-year notes fell after European Central Bank President Jean- Claude Trichet signaled policy makers are ready to raise interest rates for a second time this year and reports showed inflation in some German states accelerated.

“We expect the Greek vote to be passed, and we should get a small sell-off in bunds and see some tightening of periphery spreads when that happens,” Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

The yield on Greek 10-year bonds fell 35 basis points to 16.45 percent, the lowest since June 9, as of 4:36 p.m. in London. The yield fell as much as 42 basis points, the biggest drop since June 17. The 6.25 percent securities maturing in June 2020 advanced 1.03, or 10.30 euros per 1,000-euro ($1,436) face amount, to 53.795. Two-year Greek yields tumbled 87 basis points to 28.51 percent.

The yield on 10-year Portuguese bonds dropped 18 basis points to 11.50 percent and the rate on similar-maturity Spanish securities was six basis points lower at 5.63 percent.

Quarterly Slump

Greek 10-year bonds have slumped this quarter, pushing yields up more than 3.5 percentage points, as traders added to bets the nation will default. The Greek parliament is debating a package of budget cuts and asset sales that’s needed before the nation can tap a fifth loan payment from last year’s 110 billion-euro bailout accord.

Creditors including German and French banks may be headed toward a rollover agreement involving 70 percent of their bonds to prevent Greece from running out of cash. The proposal by French banks depends upon credit-rating firms not cutting their grade on Greece and existing or newly issued government securities to default, according to a draft of the plan.

Germany’s biggest banks and insurers will meet with the Finance Ministry in Berlin tomorrow as they seek to reach an agreement on their contribution to a Greek aid package, according to two people with knowledge of the matter.

“The market is looking more to the positive side right now and that’s spilling over into general sentiment toward peripherals,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The news flow regarding Greece has been slightly upbeat. It looks like there is a chance we will see an approval of the new savings package, which will clear the way for further funding.”

‘No Plan B’

Fitch Ratings will “very likely” deem Greece in default should the European Union go ahead with the plan to get private investors to roll over their Greek bonds, David Riley, London- based head of sovereign ratings, wrote in a letter in the Financial Times today. There is “no plan B” for Greece to avoid default if it doesn’t endorse the revised economic plan, European Union Economic and Monetary Commissioner Olli Rehn said in a statement today.

German two-year notes dropped, with the yield rising nine basis points to 1.47 percent. The 10-year bund yield was four basis points higher at 2.93 percent.

“We’re taking the decision progressively to anchor inflation expectations,” Trichet said at a press conference in Amsterdam today following a seminar with central bankers from the Asia-Pacific region. “As far as we’re concerned, we’re in strong vigilance mode.”

Trichet has used the “strong vigilance” phrasing in speeches before previous interest-rate increases.

Inflation quickened to 2.1 percent in the German state of Hesse and to 2.5 percent in North Rhine-Westphalia, data today showed.

Italian Auction

The yield on 10-year Italian securities was little changed, after earlier rising as much as four basis points to 5 percent. The nation sold 3 billion euros of 10-year bonds at a yield of 4.94 percent, up from 4.73 percent when securities of similar maturity were auctioned on May 30. Investors demanded 1.33 times the amount of bonds sold, compared with a bid-to-cover ratio of 1.50 at the last sale.

Market research group GfK AG forecast that its consumer sentiment index, based on a survey of about 2,000 Germans, will rise to 5.7 in July from a revised 5.6 in June. Economists in a Bloomberg survey predicted the index would fall to 5.3.

Germany plans to sell 60 billion euros of debt in the third quarter, the Federal Finance Agency said, cutting its sales target by 16 percent from December.

German government bonds handed investors a profit of 0.8 percent this year, compared with 3.4 percent for U.S. Treasuries and 3.2 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

--With assistance from Sonia Sirletti in Milan. Editors: Keith Campbell, Mark McCord.

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

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


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