Bloomberg News

Bunds Fall on Concern Bailout Costs to Rise; Spanish Bonds Gain

October 21, 2011

Oct. 21 (Bloomberg) -- Bunds fell the most in two weeks amid speculation European leaders are planning a 940 billion- euro ($1.29 trillion) package to fight the debt crisis, fueling concern German taxpayers will have to fund increased bailouts.

Bunds pared a weekly gain as stocks rose on optimism the plan will contain Europe’s debt woes, damping demand for safer securities. Europe’s finance ministers are meeting today before euro-area leaders gather for summits on Oct. 23 and Oct. 26 to work on a durable solution. Spanish and Italian bonds gained as the European Central Bank was said to buy the securities. French bonds extended a weekly decline.

“Someone is going to have to pay the bill for an expanded bailout and that responsibility will fall on the bigger countries like Germany,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Bunds are also coming under a bit of pressure because equities are performing quite well. The equity market seems to be quite hopeful that something positive is going to come out of the weekend summit.”

The 10-year bund yield rose 11 basis points, or 0.11 percentage point, to 2.10 percent at 4:11 p.m. London time, after climbing as much as 12 basis points, the most since Oct. 5. The 2.25 percent bond due September 2021 fell 0.95, or 9.5 euros per 1,000-euro face amount, to 101.29. The two-year rate increased six basis points to 0.65 percent.

The Stoxx Europe 600 Index gained 2.2 percent and the Standard & Poor’s 500 Index climbed 1.5 percent on speculation European officials are moving closer to containing the regional debt crisis.

Enhanced Fund

With President Barack Obama stressing the “urgency” of a fix, divisions between Germany and France festered as finance ministers arrived in Brussels for the start of the anti-crisis marathon. As a first step, they are set to approve releasing the next aid payment for Greece.

The talks “will be tough and the situation is serious,” Dutch Finance Minister Jan Kees de Jager said. “We really need to step up efforts, make extra reforms, extra cuts and strict agreements on budgets.”

The temporary 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. A consensus is now emerging among European leaders that it should be merged instead of replaced with the planned permanent European Stability Mechanism in mid-2013, a fund which will hold 500 billion euros, the people said.

ECB Buying

The ECB bought small amounts of Spanish and Italian government debt today, according to two people with direct knowledge of the transactions, who asked not to be identified because the deals are confidential.

Spanish 10-year bonds snapped a nine-day decline, with yields falling five basis points to 5.48 percent. Italy’s 10- year rate dropped 12 basis points to 5.90 percent.

French bonds fell on concern the expanded bailout fund will put extra pressure on the country’s finances.

“France is the least able to afford the cost of an expanded bailout package among AAA nations,” said Lyn Graham- Taylor, a fixed-income strategist at Rabobank International in London. “They’ll probably eventually lose their AAA rating.”

France’s 10-year yield climbed 10 basis points to 3.25 percent. The spread over similar-maturity bunds narrowed for the first time in seven days, shrinking to 114 basis points, after earlier reaching 121 basis points, the widest since 1992 based on closing Bloomberg generic prices.

S&P Warning

Standard & Poor’s today followed a warning from Moody’s Investors Service earlier this week that France risks losing its top credit rating. France may have its AAA ranking downgraded while Spain, Italy, Ireland and Portugal may also be reduced by one or two levels in either of New York-based S&P’s two stress scenarios, the ratings firm said in a report today.

Yields on benchmark Greek bonds due June 2020 rose 14 basis points to 23.03 percent. Two-year rates climbed 43 basis points to 77.27 percent.

German bonds have returned 7.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt gained 2.9 percent, and Treasuries rose 7.9 percent. Italian bonds lost 4.7 percent, even as the European Central Bank bought the securities.

--Editors: Mark McCord, 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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