German Bunds Rise Before Greece Assessment; Spanish Bonds Fall
September 19, 2011, 8:37 AM EDTBy Lukanyo Mnyanda and Lucy Meakin
Sept. 19 (Bloomberg) -- German government bonds rose for a second day as European Union and International Monetary Fund officials prepared to assess whether Greece can meet the conditions for its rescue amid concern the nation will default.
The yield on German two-year notes dropped below 0.50 percent as the Stoxx Europe 600 Index fell 1.9 percent, boosting the appeal of Germany’s debt as a haven. Spanish and Italian bonds declined even as the European Central Bank was said to be buying the securities. Germany rejected using the ECB to boost the euro-area rescue fund’s firepower during a meeting of finance chiefs over the weekend.
“The negative news flow is underpinning bunds,” said David Schnautz, a London-based fixed-income strategist at Commerzbank AG. “I expect bunds to remain firm today. They may dip a little because we opened so much on the front foot but it should be a rather brief and I expect bunds to rally.”
German 10-year bund yields declined six basis points to 1.80 percent at 12:54 p.m. in London. They reached a record low 1.68 percent on Sept. 13. The 2.25 percent security due September 2021 rose 0.575, or 5.75 euros per 1,000-euro ($1,367) face amount, to 104.060. Two-year yields dropped four basis points to 0.47 percent, the lowest level since Sept. 13.
The IMF and EU are reviewing whether Greece can meet the conditions of its rescue loans and is eligible for the next payment due in October and for a second package. They suspended their assessment earlier this month after discovering a shortfall in the budget.
Safer Assets
Greece is struggling to meet budget targets amid a deepening recession. The economy will shrink 5.5 percent this year and contract “notably” next year, Finance Minister Evangelos Venizelos said at conference in Athens today.
French bonds also declined versus bunds as investors favored the region’s safest assets.
The French 10-year yield rose one basis point to 2.61 percent, after sliding 11-basis points on Sept. 16. They yielded 81 basis points more than similar bunds, from 74 basis points at the end of last week.
The euro area plans to decide Oct. 3 on whether to approve the next aid payment for Greece from last year’s 110 billion- euro rescue, Austrian Finance Minister Maria Fekter said on Sept. 16. Approval of the payment on Oct. 3 would allow the money to reach Greece by Oct. 14, according to Fekter.
Credit-Default Swaps
The delay “increases significantly the odds of a Greek default, because Greece has already announced it will run out of cash for mid-October,” Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam, wrote in a client note today.
Greece has enough money for 769 million euros of coupon payment due tomorrow, Giansanti said in a telephone interview today. “I don’t think this coupon is a problem,” he said. “The problem will arise after mid October.”
The cost of insuring European sovereign debt rose. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments advanced 13 basis points to 338, approaching the record 354 on Sept. 12. Swaps on Greece signal a 94 percent chance of default within five years, according to CMA.
German government bonds have returned 7.6 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Treasuries gained 8.1 percent, the indexes show. Greek bonds have tumbled 34 percent.
ECB Purchases
Italy’s 10-year yield increased nine basis points to 5.60 percent and Spanish 10-year rates climbed seven basis points to 5.35 percent. Greece’s 10-year yield rose 171 basis points to 22.90 percent. The extra yield, or spread investors demand to hold the Greek securities instead of their German counterparts increased by 180 basis points to 21.13 percentage points.
The ECB, which started buying Italian and Spanish government bonds last month, purchased more of the nations’ assets today, according to three people with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokesman for the central bank declined to comment.
Since its bond-purchase program began on May 10, 2010, the ECB spent 143 billion euros on sovereign bonds through Sept. 9.
German Chancellor Angela Merkel’s party lost a state election in Berlin yesterday amid voter anger over her handling of the debt crisis, while Sweden’s Finance Minister Anders Borg said after a two-day meeting of European Union finance ministers and central bankers ended Sept. 17 that Greece hasn’t done enough to meet its budget targets.
--With assistance from Abigail Moses and Keith Jenkins in London, Jonathan Stearns in Brussels, Natalie Weeks and Maria Petrakis in Athens. Editors: Mark McCord, Nicholas Reynolds
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
