Bloomberg News

German Bonds Drop on Bank Plans; Belgian, Greek Debt Declines

October 10, 2011

Oct. 10 (Bloomberg) -- German 10-year bunds fell, pushing yields to the highest in more than five weeks, after Germany and France’s leaders said they will draw up a plan to recapitalize banks and stop Greece’s debt crisis spreading.

Belgian and French bonds slid as the nations pushed ahead with plans to support beleaguered lender Dexia SA. Greek and Portuguese securities also tumbled amid speculation bondholders may need to take greater losses on Greece’s debt as part of the rescue plan. Belgium’s debt rating was put on review for downgrade by Moody’s Investors Service on Oct. 7, and Fitch Ratings lowered Italy and Spain’s credit rankings the same day.

“Bunds are vulnerable to any kind of resolution to the debt crisis,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. Support for Dexia “will put Belgian debt under pressure” and isn’t “a positive story for France,” he wrote in an e-mailed note today.

The 10-year bund yield rose eight basis points, or 0.08 percentage point, to 2.09 percent at 4:42 p.m. London time, the highest since Sept. 2. The 2.25 percent security maturing September 2021 slipped 0.770, or 7.70 euros per 1,000-euro ($1,365) face amount, to 101.435. Two-year note yields climbed five basis points to 0.65 percent.

Bund futures fell 0.9 percent to 134.61, dropping to less than the 55-day moving average for the first time since May 5. The euro rose 2.2 percent to $1.3667 and the Stoxx Europe 600 Index of shares jumped 1.6 percent.

‘Less Gung-Ho’

German 10-year bonds declined last week, the first time they’ve dropped for two consecutive weeks since the period ending April 8, as optimism policy makers are working on a comprehensive plan to deal with sovereign-debt woes reduced demand for the safest assets. The European Central Bank also adopted measures, including one-year loans for banks, to stem the spread of the financial crisis.

“We will recapitalize the banks,” French President Nicolas Sarkozy said in Berlin yesterday at a joint briefing with German Chancellor Angela Merkel. “By the end of the month, we will have responded to the crisis issue.”

The potential recapitalization of the region’s banks may prevent the safest government bonds from extending this year’s advance, according to Royal Bank of Scotland Group Plc.

“We are all being a bit more circumspect and less gung-ho about our bond-bull stance,” Andrew Roberts, head of European rates strategy in London, wrote in an investor report on Oct. 7. Such a plan for the region’s lenders “risks a bund shake-out,” Roberts said.

Dexia Deal

Belgian 10-year bonds dropped after the federal government said it agreed to pay 4 billion euros for the local consumer- lending unit of Dexia SA and guarantee some of the lender’s troubled assets. Dexia’s board also instructed Chief Executive Officer Pierre Mariani to enter into exclusive talks with France’s Caisse des Depots et Consignations and La Banque Postale for an agreement on the financing of French local authorities, the bank said in a statement.

The yield on 10-year Belgian debt increased eight basis points to 4.07 percent. The rate on French securities climbed 10 basis points to 2.86 percent.

Greek 10-year bond yields jumped 38 basis points to 23.91 percent after German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached an agreement on private-sector involvement.

Greek Debt

Two-year note yields rose the most since Sept. 14, gaining as much as 629 basis points, or 6.29 percentage points, to 73.51 percent.

Euro-area finance ministers are discussing scenarios for a so-called Greek haircut of as much as 60 percent, Deutsche Presse-Agentur reported, citing people in the finance industry and people familiar with the negotiations. Such a debt restructuring would affect both banks and taxpayers, DPA said.

A team of inspectors from the International Monetary Fund, the European Union and the European Central Bank will probably conclude a review of Greece’s economy by tomorrow, the Finance Ministry in Athens said in an e-mailed statement. European leaders pushed back a debt-crisis summit to Oct. 23 from Oct. 18.

The yield on Portuguese bonds due in 10 years rose 16 basis points to 11.41 percent as Moody’s said a disorderly default by the Greek government would pose the biggest near-term disruption risk to Portugal’s reform.

Spain, Italy Cut

Europe’s officials haven’t done enough on fiscal turmoil to persuade investors to buy the region’s sovereign debt, Pacific Investment Management Co.’s head of European portfolio management, Andrew Balls, said today in a Bloomberg Television interview with Betty Liu on the “In the Loop” program.

The rate on 10-year Italian debt increased six basis points to 5.58 percent, while the yield on similar-maturity Spanish bonds was little changed at 4.98 percent.

Spain was cut to AA- from AA+, while Italy was lowered to A+ from AA-, Fitch said in statements after the market closed on Oct. 7. The outlook for both countries is negative.

Russia’s government, holder of the world’s third-largest reserves, discussed buying Spanish sovereign debt at a meeting with Finance Minister Elena Salgado, Arkady Dvorkovich, the Kremlin’s top economic adviser, said today in Moscow.

Bunds have handed investors a profit of 7 percent this year, while Treasuries have returned 8.3 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have made 5.8 percent for investors while Italian securities lost 2.4 percent.

--With assistance from Jana Randow in Frankfurt. Editors: Mark McCord, Peter Branton

To contact the reporter on this story: Paul Dobson in London at

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

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