Bloomberg News

Greek, Italian Bonds Slide as Bunds Have Best Year Since 2008

January 03, 2012

Dec. 31 (Bloomberg) -- Greek and Italian government bonds had their worst years on record as Europe’s financial woes intensified, driving investors to sell securities of Europe’s most indebted nations.

German bonds rallied, making the largest profit since 2008, as the crisis spurred demand for the region’s safest fixed- income assets. Fifteen European summits in two years have produced five plans without managing to quell the turmoil that started in Greece and this year infected Italy, Spain and France. As bondholders negotiated writedowns of Greek bonds, the European Central Bank was said to begin buying Italian and Spanish debt in an effort to stem financial contagion.

“This year was the wake-up call,” said Steven Major, the global head of fixed income research at HSBC Holdings Plc in London. “Only Germany came through the year looking like a true sovereign, and it got the full benefit. The others are all exposed.”

Greek bonds handed investors a 63 percent loss through Dec. 29, the largest since at least 2000, according to indexes compiled by Bloomberg and European Federation of Financial Analysts Societies. Italian bonds lost 5.7 percent for the worst year since at least 1992. German securities, Europe’s benchmark government debt, made a 9.6 percent return, according to the Bloomberg/EFFAS indexes.

Aid Request

Italy’s 10-year yield ended the year near the 7 percent mark that led Greece and Ireland to seek international bailouts last year and Portugal to follow with an aid request in April. The nation sold 7 billion euros ($9.06 billion) of bonds two days ago, less than the maximum target of 8.5 billion euros, including a sale of 5 percent 2022 bonds at a yield 6.98 percent.

The 10-year rate reached 7.483 percent on Nov. 9, the most since the euro was introduced in 1999. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, sold its entire holdings of Italian government bonds by Nov. 10, a weekly report from the fund showed. BNP Paribas SA and Commerzbank AG said in earnings reports the same month that they were unloading sovereign bonds at a loss.

The government of Italy’s Prime Minister Mario Monti expects to raise almost half a trillion euros from bond and bill sales next year as the economy sinks into its fourth recession since 2001. Europe’s governments need to persuade banks and investors to buy 1.1 trillion euros of debt to repay long- and short-term securities next year, data compiled by Bloomberg show.

Debt-Swap Agreement

The price of Greek two-year notes slid to as little as 25 cents on the euro, with yields surging as high as 156.60 percent, as the nation negotiated a debt-swap agreement with creditors. The swap, part of a 130 billion-euro second bailout agreement for Greece, is supposed to help reduce its debt to 120 percent of gross domestic product by 2020. The country’s 206 billion euros of privately held debt would be reduced by 50 percent under an agreement announced at an Oct. 26 summit of European leaders in Brussels.

German and Dutch two-year note yields were pushed to records in the past week amid speculation ECB President Mario Draghi will continue with measures to boost the economy. He oversaw two cuts in the central bank’s benchmark interest rate and offered banks unlimited loans for as much as three years after taking over from Jean-Claude Trichet.

Germany’s two-year note yield reached a record-low 0.142 percent on Dec. 29 and the Dutch rate reached 0.153 percent yesterday.

Ratings Cut

Amid concern the debt crisis may prompt ratings agencies to cut their grades for some of Europe’s AAA rated nations, French and Austrian 10-year yields also rose to euro-era records relative to benchmark German bunds in November. Standard & Poor’s on Dec. 5 put Germany, France and 13 other euro-area nations on review for a downgrade, saying “continuing disagreements among European policy makers on how to tackle” the region’s debt crisis risk damaging their financial stability.

French President Nicolas Sarkozy is set to travel to Berlin on Jan. 9 to resume talks with German Chancellor Angela Merkel on ending the euro-region debt crisis, an official familiar with the matter said two days ago. The efforts to fix the crisis may ultimately weigh on German bonds, said HSBC’s Major.

“Someone has to pay and ultimately it’s for the good of Germany that the euro survives,” Major said. “Common issuance is an inevitable part of any solution,” he said, referring to joint bond sales by European nations.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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


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