Bloomberg News

Bunds Rise on Slowdown Signs, Greece Concern; Italian Bonds Fall

February 22, 2012

Feb. 22 (Bloomberg) -- German bunds advanced for the first time in a week after European reports showed services and manufacturing unexpectedly contracted this month, boosting demand for the region’s safest securities.

Italian and Portuguese bonds dropped amid concern a planned Greek debt-swap agreed by European finance ministers this week will prove difficult to implement. Greek bonds declined after Fitch Ratings cut the nation’s credit ranking by two levels and said a default was “highly likely.” Germany sold 4.28 billion euros ($5.67 billion) of new benchmark two-year notes.

“It’s a typical reaction to the risk off -- bunds rally and Italy and Spain underperform,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The market expected strong numbers and it came weaker,” he said.

Germany’s 10-year yield fell nine basis points, or 0.09 percentage point, to 1.89 percent at 5 p.m. London time after rising 12 basis points over the previous four days. The 2 percent bund maturing in January 2022 gained 0.805, or 8.05 euros per 1,000-euro face amount, to 100.96.

A euro-area composite index based on a survey of purchasing managers in services and manufacturing dropped to 49.7 from 50.4 in January, London-based Markit Economics said today in an initial estimate. Economists forecast a reading of 50.5, according to a Bloomberg News survey. A figure below 50 indicates contraction.

Italian Bonds

The yield on Italy’s 10-year bond increased eight basis points to 5.51 percent after falling to 5.36 percent yesterday, the lowest level since Sept. 9.

The extra yield investors demand to hold the securities instead of similar-maturity German bunds widened 17 basis points to 3.62 percentage points. The spread contracted to 3.37 yesterday, the narrowest since September.

Portuguese and Spanish bonds also underperformed bunds. Portugal’s 10-year yield rose 12 basis points to 12.45 percent, and its two-year yield jumped 90 basis points to 13.63 percent. Spain’s 10-year yield was little changed at 5.09 percent.

Germany sold 0.25 percent notes due in March 2014 at an average yield of 0.25 percent, compared with 0.17 percent at an auction of similar-maturity debt on Jan. 18. The sale attracted bids for 1.8 times the amount allocated to investors.

“Despite the very low level of yields, the demand was significant and may be suggesting to the market that in this session there is still a risk-off mode to exploit,” said Matteo Regesta, a senior interest-rate strategist at BNP Paribas SA in London. “With two-year yields at 25 basis points a strong result can be seen as a measure to gauge the risk-off mode.”

Greek Default

Greece’s benchmark October 2022 bonds fell after Fitch said a default was “highly likely in the near term” as it lowered the nation’s credit rating to C from CCC.

The Greek government said yesterday it will introduce legislation to Parliament for so-called collective action clauses that will allow it to enforce losses on bondholders that refuse the exchange.

“Collective action clauses by definition trigger a selective default by the rating agencies,” Regesta said.

The yield on the October 2022 bonds increased 95 basis points to 34.36 percent, and the price declined to 20.54 percent of face value.

Volatility on Greek debt was among the highest in euro-area markets after Germany, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The change in the spread was three-times the 90-day average.

German bunds have handed investors a loss of 0.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds rose 1.1 percent, and Greek bonds dropped 3 percent.

--Editors: Nicholas Reynolds, Paul Dobson

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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