Bloomberg News

Bunds Advance as Germany Damps Debt Optimism; Greek Notes Fall

October 17, 2011

Oct. 17 (Bloomberg) -- Bunds rose, with benchmark yields dropping from a six-week high, as Germany rebuffed optimism that the latest plan to end the region’s debt woes will bring an imminent resolution to the crisis.

Dutch and Norwegian bonds also gained after German Chancellor Angela Merkel’s chief spokesman Steffen Seibert said a quick end to the crisis that investors are hoping for at a Group of 20 summit on Oct. 23 was unlikely. Leaders won’t present a “definitive solution” at the meeting in Brussels, according to German Finance Minister Wolfgang Schaeuble. Greek, Spanish and Italian two-year notes declined.

“They want to see what will come out of the meeting” before buying bonds of the euro-area’s most indebted nations instead of bunds, said Alessandro Giansanti, a senior interest- rates strategist at ING Groep NV in Amsterdam. “We really need hard news from the meeting. There’s a lot of risk inside the peripheral countries.”

German 10-year yields declined 10 basis points, or 0.10 percentage point, to 2.10 percent at 4:27 p.m. London time. They earlier rose to 2.25 percent, the highest since Sept. 1. The 2.25 percent security due September 2021 gained 0.865, or 8.65 euros per 1,000-euro ($1,377) face amount, to 101.31. Two-year rates dropped eight basis points to 0.58 percent.

“Dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Seibert said at a news briefing in Berlin today.

Paris Talks

G-20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set the Oct. 23 summit as the deadline for it to be delivered.

German 10-year yields have risen from a record low 1.636 percent on Sept. 23 as euro-region governments came under pressure from officials, including U.S. Treasury Secretary Timothy F. Geithner, to bring the debt crisis under control. Yields are still more than a percentage point below the average of 3.45 percent for the past five years.

Investors “are more or less speculating about what’s going to come up” at the summit, said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. “Something more severe in terms of private-sector involvement and also something more lasting for Greece will have to come from there.”

‘Coordinated Way’

Bonds issued by other European nations perceived to be havens also gained. Dutch 10-year yields declined 11 basis points to 2.50 percent, Norway’s rates dropped five basis points to 2.72 percent and Swedish yields slid nine basis points to 1.94 percent.

On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said.

Euro members will seek consensus on five elements of a plan to solve the region’s woes, including a debt reduction for Greece, Reuters cited Schaeuble as saying in a speech at a tax advisers’ conference in Dusseldorf.

The EFSF bailout fund needs 1 trillion euros, Le Figaro reported Bank of Canada Governor Mark Carney as saying. The rescue fund needs to be large enough to finance the debts of Greece, Ireland, Portugal, Spain and Italy, the newspaper quoted Carney as saying in an interview.

Greek Notes

Greek two-year notes dropped for a second day, with yields climbing 68 basis points to 74.82 percent. Similar maturity Italian rates rose six basis points to 4.38 percent, and Spanish yields increased eight basis points to 3.75 percent.

A new round of European Banking Authority stress tests may include a reduction in the value of Spanish sovereign debt by as much as 20 percent, El Mundo reported yesterday, without saying where it got the information.

Mariano Rajoy, leader of the opposition People’s Party, asked Spanish Prime Minister Jose Luis Rodriguez Zapatero yesterday to try to stop the plan, the newspaper reported.

German bonds have handed investors 5.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That compares with a return of 7.6 percent for U.S. Treasuries. Greek bonds have tumbled 41 percent.

--With assistance from Rainer Buergin in Paris. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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