Bloomberg News

German Bunds Jump on Haven Bid; Greek Note Yield Approaches 70%

September 12, 2011

Sept. 12 (Bloomberg) -- Bunds gained for a third day, driving 10-year yields down to a record, on speculation German Chancellor Angela Merkel is preparing for a Greek default.

Greece’s two-year note yields climbed toward 70 percent even after Prime Minister George Papandreou approved new measures to help plug the budget deficit. Italian bonds fell as demand declined at a bill auction today. The cost of insuring European sovereign debt from default rose to an all-time high, according to credit-default swaps. Dutch, Finnish and Austrian 10-year yields dropped to the least since the euro was introduced in 1999.

“Despite Greece announcing extra measures, the overriding discussion in the market is about a potential default and possible exit from the euro,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “This is pushing investors more into safe-haven territory.”

German 10-year bund yields slid two basis points to 1.75 percent at 4:27 p.m. in London, after falling to a record 1.705 percent. The 2.25 percent security due September 2021 advanced 0.220, or 2.20 euros per 1,000-euro ($1,364) face amount, to 104.555. Two-year yields climbed four basis points to 0.43 percent after falling to 0.359 percent, the lowest since the euro’s introduction.

The Stoxx Europe 600 Index slumped 2.4 percent and the Standard & Poor’s 500 Index dropped 0.5 percent. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 15 basis points to 351 basis points. The euro fell to a 10-year low against the yen and the weakest since February versus the dollar.

Greek Yields

Credit-default swaps on Greece, Italy and France surged to records, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Italy increased 38 basis points to 503 and France was up 12 at 190.

Investors have to pay $5.65 million upfront and $100,000 annually to insure $10 million of Greek debt for five years, up from $5.5 million in advance on Sept. 9, CMA prices show.

Greek two-year note yields jumped more than 12 percentage points to a euro-era record 69.551 percent, after climbing 9.8 percentage points last week. Ten-year yields advanced 301 basis points to an all-time high 23.56 percent, pushing the yield difference, or spread, versus similar-maturity German bunds to 2,181 basis points, or 21.81 percentage points.

The decisions taken by European leaders in July to bail out Greece “won’t suffice” to save the nation from default, Lars Feld, a German government adviser, said in an interview today with Bloomberg Television. Feld said he sees a restructuring of Greek debt by spring or summer of 2012.

New Measures

A new set of measures will help Greece meet deficit targets of 17.1 billion euros in 2011 and 14.9 billion euros in 2012, covering a 2 billion-euro shortfall for this year that has been exacerbated by a deepening recession, according to Finance Minister Evangelos Venizelos.

French 10-year bond yields dropped to a record low 2.444 percent, before rising four basis points to 2.52 percent. Similar-maturity Dutch rates fell as low as 2.168 percent, while Austrian yields dropped to 2.489 percent. Finnish 10-year yields also declined to a euro-era low of 2.203 percent.

German, Dutch and Finnish bonds jumped last week and Greek, Spanish and Italian bonds fell, on concern Europe’s debt crisis is intensifying. Group of Seven finance chiefs said after weekend talks in Marseille, France, they would support banks and buoy slowing growth. The euro is under “existential threat,” Nobel laureate economist Paul Krugman wrote in the New York Times today.

Currency Swaps

The premium European banks pay to borrow in dollars for 12 months through the swaps markets increased to the most since December 2008, a sign lenders may be struggling to get funding.

The cost of converting euro-based payments into dollars, as measured by the 12-month cross-currency basis swap, fell to as low as 78.75 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback, according to Bloomberg data. Basis swaps allow banks to borrow in one currency, while simultaneously lending in another.

Italian bonds fell even as the European Central Bank was said to buy the nation’s securities. The yield on the 10-year bond rose 16 basis points to 5.57 percent. The nation’s two-year yields jumped 36 basis points to 4.51 percent. Spain’s 10-year rates advanced 17 basis points to 5.32 percent, and two-year yields climbed 22 basis points to 3.82 percent.

Supply ‘Test’

Italy sold 11.5 billion euros of bills today, while Spain will auction securities due in 2019 and 2020 on Sept. 15.

“We’ve got some supply in Italy and Spain this week which will be a test for the market,” said Philip Tyson, head of interest-rate strategy at MF Global UK Ltd. in London. “It’s going to remain very difficult.”

The Italian Treasury sold 7.5 billion euros of one-year bills at an average yield of 4.153 percent, compared with 2.959 percent the previous sale of the securities on Aug. 10. Demand dropped to 1.53 times the amount on offer, from 1.94.

The Treasury also sold 4 billion euros of three-month bills. The yield was 1.907 percent, up from 1.034 percent the last time such securities were sold, on March 10. The bid-to- cover ratio declined to 1.86 versus 2.42.

Italy is scheduled to sell up to 4 billion euros of 4.75 percent notes maturing in September 2016 tomorrow. It also plans to sell debt due in 2018, and two bonds due in 2020.

ECB Buying

Italian bonds pared losses as the ECB bought the securities in the secondary markets, according to two people with knowledge of the transactions. A spokesman for the Frankfurt-based central bank declined to comment.

The ECB began purchasing Spanish and Italian bonds on Aug. 8 to curb a surge in yields as contagion from the debt crisis that engulfed Greece, Ireland and Portugal spread to the region’s third- and fourth-largest economies.

The ECB said today it settled 14 billion euros of bond purchases in the week through Sept. 9, up from 13.3 billion euros the previous week.

The ECB left interest rates on hold at 1.5 percent on Sept. 8. It has increased its main refinancing rate by 25 basis points twice in the last six months, on April 7 and July 7, from a record low 1 percent.

A Credit Suisse Group AG index based on swaps shows traders are betting the ECB will lower its refinancing rate by 32 basis points over the next 12 months. As recently as Aug. 1, they forecast an increase of 25 basis points.

German bunds have returned 8.1 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds slid 32 percent, while Italy’s have declined 2.1 percent, the indexes show.

--With assistance from Abigail Moses in London. Editors: Daniel Tilles, Nicholas Reynolds

To contact the reporters on this story: Keith Jenkins in London at; Emma Charlton in London at

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

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