Bloomberg News

Bunds Advance on Moody’s Spain Rating Threat, U.S. Debt Concern

July 29, 2011

July 29 (Bloomberg) -- German bonds rose for a sixth day, the longest run of gains since November, after Moody’s Investors Service said it may cut Spain’s credit rating amid prospects for early elections in the Mediterranean nation.

The weekly advance pushed the yield on the 10-year bund down by the most since the five days ended Dec. 19, 2008, as investors diversified away from U.S. securities. Data today showed the world’s largest economy grew less than forecast in the second quarter. House Speaker John Boehner yesterday canceled a vote on his plan to raise the debt limit, prolonging a stalemate among lawmakers and the risk of a default.

Spain’s downgrade threat, “together with the news from the U.S. and ongoing month-end index demand, should keep bunds supported into the weekend,” said Christopher Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “The fact that the downgrade should not be more than one notch should limit the damage.”

Ten-year bund yields fell nine basis points to 2.54 percent as of 4:39 p.m. in London. The 3.25 percent security maturing in July 2021 gained 0.84, or 8.4 euros per 1,000-euro ($1,440) face amount, to 106.145. Yields on two-year notes declined eight basis points to 1.16 percent.

Spanish 10-year bonds fell for a third straight day, pushing the yield on the securities five basis points higher to 6.08 percent, after earlier climbing as high as 6.15 percent. The additional yield investors demand to hold the securities instead of benchmark German bunds rose by 14 basis points to 354 basis points.

Moody’s Review

Portuguese two-year notes snapped an eight-day advance, sending yields up 30 basis points to 14.59 percent. Similar- maturity Irish yields jumped 66 basis points to 14.37 percent.

“In the shaky and low-liquidity market we have, this increases the tension,” Norbert Aul, a European rates strategist at RBC Capital Markets in London, said of the downgrade threat from Moody’s. “In an environment like this, bunds will remain well bid and spreads are on the back foot.”

Moody’s is reviewing Spain’s Aa2 classification, citing concern about implementation of the 440 billion-euro European rescue fund. The euro region’s fourth-largest economy has the same credit rating as Italy, which is also on review for downgrade by Moody’s.

“Pressures are likely to increase still further following the announcement of the official package for Greece, which has signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits,” Moody’s said in a statement today. Another concern is that it’s “not clear” when the bailout fund’s new powers will be implemented, Moody’s said.

Election Outlook

Spanish Prime Minister Jose Luis Rodriguez Zapatero today called for early elections as austerity measures erode support for his ruling Socialist Party as it seeks to convince investors it can control the government budget deficit. The nation will go to the polls on Nov. 20.

Italian Prime Minister Silvio Berlusconi survived a confidence vote in the Senate. The upper house voted 160 to 139 in Rome in favor of legislation related to the length of trials, a bill critics say will help shield him from prosecution. It was the 48th time he has used the mechanism to end debate and drive through legislation.

The Italian 10-year yield rose five basis points to 5.88 percent. The spread to bunds increased 14 basis points to 333 basis points. The bonds headed for the third weekly drop in four weeks after speculation that Finance Minister Giulio Tremonti may resign pushed up yields.

Tremonti Speculation

Tremonti, widely credited with keeping Italy’s public finances in check during the financial turmoil of the past three years, came under pressure yesterday as newspapers including Corriere della Sera published alleged details of his dealings with Marco Milanese, a former aide who is under investigation by Naples prosecutors for alleged graft.

Tremonti admitted he made “mistakes” and denied any “unlawful acts,” according to a letter published in the Italian daily today.

Bunds extended gains after a report showed U.S. gross domestic product rose at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than previously estimated. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase.

Belgian Bonds

The additional yield investors demand to hold Belgian 10- year bonds instead of benchmark bunds widened to a record as Belgium saw slower growth. Gross domestic product in the euro area’s sixth-largest economy expanded 0.7 percent from the first quarter.

The spread widened to as much as 186 basis points, the most since Bloomberg began collecting the data in 1993.

The risk of writedowns and more contagion from the debt crisis helped to drag the Stoxx 600 Banks Index down for the fifth time in six days.

Credit Agricole SA said losses at its Greek unit and costs tied to Europe’s aid plan for the country will lower second- quarter profit by as much as 850 million euros. The French bank said the participation of its Emporiki Bank of Greece SA in a program to involve private investors will result in an estimated 71 million-euro impairment to the unit’s Greek bond holdings.

Swap Spread

Greek two-year note yields jumped 274 basis points to 32.87 percent. The yields have climbed more than 20 percentage points since the start of this year, surging to a record 40.46 percent on July 20.

The 10-year euro swap spread, which shows the difference between the swap rate and the yield on benchmark German bunds and is used as a measure of perceived risk, rose for a fifth day, climbing to 60 basis points, the most since January 2009.

German government bonds handed investors 2.4 percent this year, compared with 3.6 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt has lost 11 percent and Italian bonds dropped 3.3 percent, while Spain’s have returned 0.2 percent.

--With assistance from Emma Charlton in London. Editors: Matthew Brown, Keith Campbell

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@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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