Bloomberg News

Greek Bonds Surge After Austerity Measures Pass; Bunds Decline

June 29, 2011

June 29 (Bloomberg) -- Greek bonds jumped, leading gains in the securities of the euro-region’s most-indebted nations, after the government passed the first part of an austerity plan aimed at winning more international aid and forestalling default.

Spanish, Italian, Portuguese and Irish bonds climbed after Greek Prime Minister George Papandreou moved a step closer to passing a 78 billion-euro ($112 billion) package of budget cuts and asset sales that is the condition for further rescue funds. German bunds dropped, led by five-year notes after demand slumped at an auction of the securities.

“The government has won the vote fairly comfortably,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “It looks increasingly likely that Greece will get the funding it needs, which pushes back the day of reckoning and that’s prompted a relief rally in peripheral markets and an unwinding of flight-to-quality in bunds.”

Greek two-year note yields sank 123 basis points to 27.32 percent as of 4:36 p.m. in London. The 4.6 percent security due May 2013 soared 1.32, or 13.20 euros per 1,000-euro face amount, to 69.63. The 10-year yield slid 17 basis points to 16.29 percent, driving the difference in yield with 10-year bunds 22 basis points lower to 1,330 basis points, or 13.30 percentage points.

Stocks rose for a third day, with the Stoxx Europe 600 Index climbing 1.7 percent, while the euro strengthened against the Swiss franc and the dollar.

Three-Year Recession

Papandreou has fought his legislative battle in tandem with a drive by European officials to convince lenders to participate in a Greek rescue. Greece needs to cover 6.6 billion euros of maturing bonds in August and government officials have said they may lack the money to pay wages and pensions by mid-July.

Implementing more austerity measures threatens to deepen a three-year Greek recession and complicate efforts to boost government revenue. Gross domestic product, which contracted 4.4 percent in 2010, will shrink a further 3.8 percent this year, according to a report from EU and IMF inspectors in June. The nation’s debt load will peak at 166 percent of GDP next year, and is already the biggest in the euro-region’s history.

Spanish 10-year bond yields dropped six basis points to 5.57 percent, with two-year yields also sliding six basis points, to 3.59 percent. Yields on 10-year Italian debt slipped four basis points to 4.95 percent, paring five days of gains.

Spreads Narrow

Spain’s 10-year bonds yielded 258 basis points more than similar-maturity bunds, the least since June 22. The spread has narrowed from 293 basis points on June 27, the most since November. The Italian spread over German bunds was at 196 basis points, down from a euro-era record 223 basis points on June 27.

Spreads have widened amid deepening concern that the crisis that led Greece, followed by Ireland and Portugal, to seek international bailouts would spread, threatening the region’s economic recovery.

An index of executive and consumer sentiment in the 17- nation euro area fell to 105.1 from 105.5 in May, the European Commission in Brussels said today. That’s the lowest since October. Economists had forecast a decline to 105, the median of 27 estimates in a Bloomberg survey showed.

German banks and insurers are meeting the finance ministry in Berlin today to discuss rolling fixed-income investments into fresh Greek debt. Fitch Ratings said it will “very likely” deem Greece in default if the European Union goes ahead with a plan to get private investors to roll over their Greek bonds.

‘Defining Moment’

“The defining moment will be when the European Union announces both the size of the Greek assistance package and the terms and conditions,” said Mark Grant, managing director at Southwest Securities Inc. in Fort Lauderdale, Florida. “The ratings agencies, if they are to be believed, will view the ‘roll over’ as a default and then, if that happens, all hell will break loose.”

The yield on German five-year notes rose by the most in more than three months as demand fell at an offering of 2.75 percent securities maturing in April 2016. The debt agency sold 4.825 billion euros of the notes, with investors bidding for 1.1 times the number of securities on offer, down from a so-called bid-to-cover ratio of 1.85 at the last sale of the bonds in May. The average yield was 2.16 percent, down from 2.45 percent.

“It was a pretty poor auction,” said Peter Schaffrik, head of European fixed-income strategy at RBC Capital Markets in London. “The bid-to-cover was pretty low and the price wasn’t very high.”

Bunds at 3%

Ten-year bund yields rose five basis points to 2.98 percent, after increasing above 3 percent for the first time in a week. Yields on two-year notes climbed nine basis points to 1.55 percent, while those on five-year securities climbed as much as 12 basis points to 2.25 percent, the most since March 3.

“Nothing is solved here but it makes sense to see a bit of a reversal” in risk appetite, said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam. “We also have this rollover plan, which is gaining momentum.”

Policy makers are in “strong vigilance mode,” European Central Bank President Jean-Claude Trichet said yesterday, signaling they intend to raise interest rates next week to tame inflation that’s been in breach of the central bank’s 2 percent limit since December.

Expectations of higher rates may have contributed to lower demand at Germany’s auction today, while some investors judged yields to be too low, according to Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London.

Portuguese Bonds Climb

“The five-year part of the curve was a bit rich if you think this is as high as the market’s going to go,” London- based Chatwell said. “Today’s not a good day for German paper. It’s the periphery that’s performing better.”

Greece’s 10-year yield has jumped more than 3.5 percentage points this quarter as euro-region policy makers struggled to contain the debt crisis.

Portuguese 10-year government yields dropped 42 basis points to 11.08 percent. The two-year yield also decreased for a second day, falling 68 basis points to 13.27 percent. Ireland’s 10-year yields fell 9 basis points to 11.76 percent.

Ten-year bonds from Greece, Ireland, Portugal and Spain rose yesterday amid speculation a euro-region default will be avoided, and as Portugal’s new government presented its austerity package, which aims to trim the region’s fourth- biggest budget deficit.

German government bonds handed investors a gain of 0.5 percent this year, compared with 2.9 percent for U.S. Treasuries and 2.4 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt has returned 1.6 percent, while Italy’s has gained 0.9 percent. Greek bonds lost 18 percent.

--With assistance from Paul Dobson in London. Editors: Mark McCord, Peter Branton

To contact the reporters on this story: Emma Charlton in London at; Lukanyo Mnyanda in Edinburgh at

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

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