Bloomberg News

Italian, Belgian Bonds Drop as Merkel Opposes Common Euro Bonds

November 25, 2011

Nov. 24 (Bloomberg) -- Italian bonds fell and Belgian yields rose to the highest in 11 years after German Chancellor Angela Merkel ruled out common debt issuance, which may help troubled countries borrow at lower costs.

Portugal’s 10-year bonds slid after Fitch Ratings cut the nation’s credit rating to below investment grade, citing rising debt levels and a weakening economy. Bunds declined for a second day. Merkel said today euro bonds are “not needed and not appropriate,” and ruled out an expanded role for the European Central Bank in fighting the debt crisis. Data from Japan’s Ministry of Finance showed the nation’s investors are selling bunds and buying more U.K. gilts.

“The market has hoped for a bigger role of the ECB in resolving the crisis as a near-term solution, and common bonds as a longer-term fix, but somehow those two ideas were rejected today,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds TSB Bank Plc in London. “That’s perhaps why peripheral yields are rising. The moves are exacerbated by thin trading volumes.”

Italian bonds fell, pushing 10-year yields up as much as 16 basis points to 7.12 percent at 4:39 p.m. London time. Belgian bonds fell for a fourth day, with 10-year rates climbing 26 basis points to 5.74 percent, the highest since September 2000.

Issuance Conditions

“Nothing has changed in my position,” Merkel said at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in France, referring to her opposition to the joint issuance of bonds in the euro area.

Italian bonds stayed lower after Monti said deficit-cutting targets for euro-region nations may be affected by Europe’s slowing economy.

The 10-year bund yield rose four basis points to 2.19 percent. The 2 percent security due January 2022 fell 0.340, or 3.40 euros per 1,000-euro ($1,340) face amount, to 98.33. The two-year note yield increased four basis points to 0.48 percent.

Bunds fell yesterday when bids at a sale of the debt fell short of the maximum amount on offer.

As policy makers seek a resolution to the debt crisis that has roiled the euro area’s bond markets for two years, the European Commission advanced the idea of bonds sold jointly by the euro area’s 17 nations in proposals yesterday. Germany’s government is concerned it may have to agree to the issuing of the common securities under certain conditions, Bild reported, without saying where it got the information.

Japanese Investors

“The selloff in German bonds continues from yesterday while discussion around euro bonds doesn’t support bunds, because ultimately it will be some form of credibility transfer” from AAA rated nations including Germany to weaker sovereigns, said Norbert Aul, a European rates strategist at RBC Capital Markets in London.

Money managers in Japan scooped up 1.53 trillion yen ($19.9 billion) of U.K. gilts in 2011 through Sept. 30, Ministry of Finance data showed on Nov. 9 in Tokyo. Japanese investors unloaded the most debt in Germany, totaling almost 1.46 trillion yen, the figures show.

Spanish 10-year bonds rose for the first time in four days, driving the yield down two basis points to 6.63 percent. Prime minister-elect Mariano Rajoy will press the European Central Bank to buy more debt from euro-region sovereigns to contain yields, El Mundo newspaper reported.

Citigroup Indexes

The Munich-based Ifo institute’s business climate index increased to 106.6 this month from 106.4 in October. German gross domestic product advanced 0.5 percent in the third quarter from the previous three months, the Federal Statistics Office said today, confirming an initial estimate.

Barclays Plc will remove Portugal’s debt from its Euro Treasury Index at the end of the month after Fitch’s rating action, said Huw Worthington, a fixed-income strategist at Barclays Capital in London.

Portugal’s 10-year yield rose 90 basis points to 12.21 percent. Volatility on the debt was the highest among developed- country markets today, according to measures of 10-year bonds, credit-default swaps, and the spread between two-and 10-year securities. The cumulative change was 6.8 times the 90-day average, the Bloomberg gauge showed. Irish debt was the second- most volatile, with the nation’s two-year note yields jumping 32 basis points to 10.28 percent.

UBS AG Chief Executive Officer Sergio Ermotti said he wouldn’t consider bonds of any euro-area country as free from risk.

The cost for European banks to fund in dollars rose to a three-year high. Three-month cross-currency basis swaps, the rate banks pay to convert euro payments into dollars, were 143 basis points below the euro interbank offered rate, from minus 140 yesterday. That’s the most expensive since December 2008.

German bonds have handed investors a return of 7.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 2.6 percent.

--With assistance from Emma Charlton in London. Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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