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Bund Yields Jump Most in 11 Weeks on EU Plan; Spain Bonds Rise

October 27, 2011

Oct. 27 (Bloomberg) -- German bonds tumbled, with 10-year yields jumping the most in 11 weeks, after European leaders agreed on a plan they said will help to resolve the region’s sovereign debt crisis.

The difference between German yields and those of Spain and Italy narrowed as the plan to boost Europe’s bailout fund and for bondholders to take 50 percent losses on Greek debt damped demand for safer assets. The cost of insuring European debt from default fell to the least in almost two months. Italian bonds extended gains as the European Central Bank was said to buy the securities. Even after dropping today, Italian and Spanish yields are still higher than at the end of last month.

“The market is taking it positively, that there is some sort of agreement,” said Karsten Linowsky, a Zurich-based fixed-income strategist at Credit Suisse Group AG. “It’s positive for risk sentiment and that is why bund yields are going up sharply.”

German 10-year yields rose 17 basis points, or 0.17 percentage point, to 2.21 percent at 4:44 p.m. London time, after rising as much as 18 basis points, the most since Aug. 8. The 2.25 percent note due September 2021 fell 1.5, or 15 euros per 1,000-euro face amount, to 100.380. Two-year rates climbed 14 basis points to 0.66 percent.

Spanish 10-year yields fell 15 basis points to 5.33 percent, down from a euro-era high 6.28 percent set Aug. 2. The spread with similar-maturity bunds narrowed 32 basis points to 312 basis points. Italy’s 10-year rates dropped five basis points to 5.88 percent, shrinking the premium over bunds to 367 basis points from 389 basis points.

10-Hour Meeting

European leaders emerged early today from the 10-hour summit in Brussels armed with a plan they said points the way out of the crisis, albeit with some details yet to be finalized.

Measures included boosting the size of the bailout fund to 1 trillion euros ($1.4 trillion), recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

“We have entered completely new territory with the haircut for Greece,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about 16 billion euros. “The first reaction is a kind of relief and we see spreads narrowing for France and other countries, and bund yields going higher.”

Greek two-year yields tumbled 284 basis points to 76.93 percent. The rate on the October 2022 bond dropped 198 basis points to 23.35 percent. The price was 32.74 percent of face value, little changed from 31.81 at the end of September.

Dutch, Finnish Debt

The bonds of other AAA rated debt also declined as demand for safety waned.

Dutch 10-year yields rose 14 basis points to 2.57 percent, and Finnish yields climbed 13 basis points to 2.62 percent. Austrian yields advanced 12 basis points to 3.05 percent.

Europe’s crisis-fighting package also eased the risk of holding sovereign debt, with the Markit iTraxx SovX Western Europe Index dropping to the lowest since Sept. 1. The gauge of credit-default swaps on 15 governments dropped 34 basis points to 300, its steepest decline since May 11.

‘Remain a Problem’

While Spanish and Italian bonds gained today, yields are still higher this month. Spanish yields are 19 basis above the level of Sept. 30, while Italian rates are up 33 basis points.

There are “no convincing arguments in this new policy response to suggest that sovereign bond spreads in the euro area will tighten meaningfully,” Harvinder Sian, a strategist at Royal Bank of Scotland Group Plc in London, wrote in a note to clients. “Deteriorating fiscal trends will remain a problem in a context of elevated sovereign debt.”

The French 10-year yield rose seven basis points to 3.13 percent. The difference over benchmark bunds shrank by 11 basis points to 92 basis points. It was 71 basis points on Sept. 30.

“Notwithstanding these positive measures, they fall short of presenting a comprehensive solution,” Michael Leister, a fixed-income strategist at WestLB AG in London, wrote today in a client note. “Too many questions regarding the implementation of these remain open.”

The ECB bought Italian debt today, according to three people with knowledge of the transactions who declined to be identified because the deals are confidential. A spokesman for the ECB declined to comment when reached by telephone.

Italy sold 750 million euros of inflation-linked bonds. The Treasury sold the debt due in September 2021 to yield 4.61 percent, up from 4.07 percent at the prior auction of the securities on July 27. Demand was 2.14 times the amount on offer, compared with 1.69 times in July.

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 3.8 percent, and Italian bonds lost 3.9 percent. Greek debt slid 43 percent.

Volatility on Finnish sovereign debt was the highest in euro-area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

--With assistance from David Goodman in London. Editors: Nicholas Reynolds, Daniel Tilles

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Garth Theunissen in London at

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

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