Bloomberg News

German Bunds Drop as Greek Election Damps Euro-Breakup Concern

June 18, 2012

German bonds declined after official projections showed pro-bailout parties won enough seats to control Greece’s parliament, damping demand for the securities as a refuge from Europe’s debt crisis.

The drop pushed up the yield on the securities to the highest in five weeks. Following yesterday’s election, European governments signaled a willingness to ease the austerity measures demanded of Greece as part of its international aid agreement, damping concern that it would be forced from the currency bloc. World leaders meeting in Mexico will agree to boost the $430 billion firewall the International Monetary Fund announced in April, host President Felipe Calderon said.

“I expect the initial reaction to be a relief rally in risk assets such as stocks and peripheral bonds, and some selloff in haven assets, especially German bonds,” Mohit Kumar, head of European interest-rate strategy at Deutsche Bank AG in London, said in a telephone interview after exit polls were released yesterday.

German 10-year yields rose nine basis points, or 0.09 percentage point, to 1.52 percent at 7:15 a.m. London time, and reached 1.55 percent, the highest since May 10. The 1.75 percent security due in July 2022 fell 0.82, or 8.20 euros per 1,000- euro ($1,272) face amount to 102.085.

The pro-bailout New Democracy and Pasok parties won enough seats to form a majority in the 300-member Greek parliament, according to an official projection.

Deeper Crisis

German bonds rallied in the aftermath of an inconclusive Greek election on May 6, driving yields of all maturities to all-time lows, as investors sought the safest assets amid speculation the Mediterranean nation may leave the 17-nation euro area.

The crisis deepened further on June 9 as Spain asked for a 100 billion-euro bailout for its beleaguered banks, driving yields on the nation’s 10-year securities to the highest since the start of the euro in 1999. Spain also saw its credit rating cut three levels last week by Moody’s Investors Service to Baa3, or the lowest investment grade.

Italian bond yields climbed to the most since January amid concern the debt crisis will spread to the currency bloc’s third-largest economy.

“There has been a strong risk-off move since the last Greek elections and the subsequent failure to form a majority coalition as fears of a Greek exit have grown,”Lyn Graham- Taylor, a fixed-income strategist at Rabobank International in London, said before the election. “In addition Spain has been forced to seek a bailout of its banks as speculation about their solvency has grown, pushing its yields higher.”

Record Yields

The average rate on bonds issued by the Group of Seven nations fell to as low as 1.12 percent this month, the least since the euro’s creation in 1999, Bank of America Merrill Lynch index data show.

Yields on government securities in the U.S., the U.K., Austria, Belgium, the Netherlands, Finland, France and Australia tumbled to all-time lows this month as Europe’s debt crisis intensified, manufacturing worldwide slowed and U.S. unemployment rose.

Spain’s 10-year yields climbed to 6.998 percent on June 14, from this year’s low of 4.83 percent reached on March 1. Similar-maturity Italian debt yields climbed to 6.34 percent last week, the highest since Jan. 20 and compared to this year’s low of 4.68 percent on March 9.

The extra yield investors demand to hold benchmark Spanish securities instead of German bunds expanded to 554 basis points on June 15, the most in the history of the euro. Italy’s 10-year yield spread over bunds increased to as much as 490 basis points on June 12 from as low as 276 basis points on March 16.

Debt Restructuring

Greece completed the largest debt restructuring in history in March, as bondholders forgave more than 100 billion euros on their government investments.

Since then, Greek bonds issued under the terms of the deal have slumped. The price of the 2 percent security due in February 2023 was at 16.42 percent of face value on June 15, down from 27.83 percent on March 12.

The bonds yielded 27.13 percent, compared with a rate of less than 17 percent on Greece’s 10-year bonds on June 17, 2011.

Of Greece’s 266 billion euros of debt, about 194 billion euros, or 73 percent, is held by the European Central Bank, euro-area governments and the International Monetary Fund, according to the Greek debt management Office in Athens. In 2010, before the first bailout, Greece owed about 310 billion euros, all to the private sector.

Greek Restructuring

The restructuring agreement was part of Greece’s second aid request from European institutions, adding to a bailout granted in 2010. Ireland and Portugal have also received aid.

In the May 6 election, pro-bailout New Democracy won the largest share of the vote, with Pasok, the Socialist party, trailing in third place. Syriza, the anti-bailout party, came second.

Policy makers are taking action amid the steepest global slowdown since 2009. Australia’s central bank cut interest rates on June 5, and Bank of England Governor Mervyn King announced joint steps with the U.K. Treasury to increase the flow of credit on June 14.

ECB President Mario Draghi left the door open for a rate cut at a June 6 press conference, while highlighting the limitations of the ECB’s tools in countering the region’s financial turmoil.

German bunds handed investors a return of 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have gained 6.9 percent and Spanish debt has lost 6 percent, the indexes show.

Since the last day of trading before the first election on May 6, German securities have gained 1.3 percent, while Spanish bonds have declined 5.4 percent and Italian securities have dropped 3 percent.

To contact the reporter on this story: 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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