Bloomberg News

Bunds Surge Amid Austerity Backlash as Greek Debt Slumps

May 12, 2012

German bunds surged, sending the nation’s borrowing costs to all-time lows, while Greece’s bonds sank as a political stalemate following inconclusive elections renewed concern it will exit the euro bloc.

Yields on two-, five, 10- and 30-year German bonds fell to records as Finance Minister Wolfgang Schaeuble suggested the euro-region could handle Greece dropping out of the 17-nation currency group. Greek 10-year bonds slid, pushing the price below that of the security it replaced in the biggest-ever debt restructuring two months ago. Spain’s 10-year bonds dropped the most in more than a month after the European Commission forecast the nation’s economy will contract this year and next.

“The main driver this week was the problems in Greece and the failure to form a coalition government,” said Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf, Germany. “While the Greek situation remains uncertain, with the risk that they may drop out of the euro, bund yields will stay lower and Greek bonds will be under pressure. Fears of a deeper recession are also dominating sentiment.”

The German 10-year yield dropped seven basis points, or 0.07 percentage point, this week to 1.52 percent at 4:43 p.m. London time yesterday, when it fell to a record 1.49 percent. The 1.75 percent bond due July 2022 gained 0.205, or 2.05 euros per 1,000-euro face amount, to 102.165.

Thirty-year bund yields slipped 10 basis points to 2.20 percent and reached an all-time low for the sixth day yesterday, touching 2.188 percent.

Deadlocked Talks

The price of Greece’s 2 percent bond maturing in 2023 sank 24 percent over the week to 18.61 percent of face value, below the 19.005 closing level of the bond it superseded in the March 9 restructuring.

Greece’s bonds tumbled as deadlocked talks over the formation of a new government reignited concern the nation won’t meet the terms of two international bailouts, increasing the risk it will leave the euro currency bloc and fail to pay back its creditors.

Schaeuble told Rheinische Post newspaper that the euro area could handle a Greek departure as “the risks of contagion for other countries of the euro zone have been reduced.”

Spain’s 10-year yield climbed 27 basis points to 6.01 percent. The extra yield investors demand to hold the bonds instead of similar-maturity German bunds widened to 459 basis points on May 9, the most since Nov. 23.

Shrinking Economies

Spain’s economy will probably shrink 1.8 percent this year and 0.3 percent in 2013, the European Commission said yesterday. Euro-region gross domestic product will rise 1 percent in 2013 after declining 0.3 percent in 2012, it said. Greece will have the deepest slump this year, with GDP declining 4.7 percent.

Data next week will show German investor confidence fell for the first time in six months in May, according to a Bloomberg survey of economists. The ZEW index of investor and analyst expectations dropped to 19 from 23.4 in April, according to the survey.

Italy will sell bonds due between 2015 and 2022 next week, while France, Germany and Spain also sell debt.

German debt has returned 2.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

To contact the reporters on this story: Emma Charlton in London at echarlton1@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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