Greek Government Bonds Lead Losses Among Indebted Nations After Rating Cut

Greek bonds slumped, leading declines among the securities of Europe’s most indebted nations, as credit downgrades for Greece and Portugal yesterday dented investors’ confidence in their ability to pay their debt.

Investors demanded more than 8 percentage points extra in yield to buy Greece’s 10-year bonds rather than benchmark German bunds after Standard & Poor’s said holders of Greek securities may recover as little as 30 percent of their investments. Italian, Spanish, Portuguese and Irish bonds also declined as Greece awaited the financial aid it requested last week. German two-year note yields dropped to a record as the crisis spurred demand for the safest assets.

“S&P said it could be as low as 30 percent -- the market has to price that in,” said Steven Major, global head of fixed- income research at HSBC Holdings Plc. “Money has to be seen to be in the Greek Treasury” to ease the crisis, he said.

The 10-year Greek bond yield rose 164 basis points to 11.69 percent as of 11:32 a.m. in London. The 6.25 percent security due June 2020 dropped 7.89, or 78.90 euros per 1,000-euro ($1,321) face amount, to 68.48.

The two-year Greek yield jumped 211 basis points to 21.10 percent, almost double the yield at the end of last week, after rising as high as 25 percent. The Irish two-year note yield surged 87 basis points to 4.61 percent, Spain’s climbed 33 basis points to 2.42 percent and Italy’s rose 58 basis points to 2.40 percent. Portugal’s two-year yield advanced 78 basis points to 6.09 percent.

Investment Losses

The two-year German note yield was little changed at 0.79 percent after reaching 0.72 percent.

Greece’s credit rating was cut three steps to junk by S&P yesterday, the first time a euro member has lost its investment grade since the currency’s 1999 debut.

The nation was lowered to BB+ from BBB+, putting Greek debt on a par with bonds issued by Azerbaijan and Egypt. It came minutes after the rating company reduced Portugal by two steps to A- from A+.

“Downgrades for Portugal and Greece fuelled more pressure on both and led to a wave of panic in the markets,” a team of UniCredit SpA analysts including Chiara Cremonesi in London wrote in a research note today. “With only the actual disbursement of the Greek aid now likely to calm investors’ nerves, periphery is likely to remain under pressure in the next days. Bunds should still be the winners in this environment.”

More ratings cuts may follow, Barclays Plc said.

Ratings ‘Cluster’

“S&P tends to cluster its rating announcements and with negative outlooks for Spain and Ireland, we would not rule out further announcements in these peripherals in the coming days,” Marek Sasura, a fixed-income strategist in London at Barclays Capital, wrote in an e-mailed note today.

Leaders of the 16 euro nations may hold a summit after the Greek government’s decision last week to tap a 45 billion-euro emergency-aid package failed to reassure investors, a European diplomat and Spanish official said.

“Greece’s needs will be met in time,” EU spokesman Amadeu Altafaj told reporters in Brussels today. “Debt restructuring in euro-area member states is not an option.”

Credit-default swaps linked to Greek government bonds surged to record highs, signaling investors perceive them to be the world’s riskiest debt ahead of Venezuela and Argentina.

‘Urgency’

“The urgency of the situation unfolding on the periphery has never been greater, in our view, and the need for decisive action to combat what is looking like an unstoppable trend is looking increasingly clear,” Sean Maloney, a fixed-income strategist at Nomura International Plc in London, wrote today in an investor note.

A slump in trading of the bonds is exaggerating price moves and leaving investors unable to sell securities, Major said.

“The activity in terms of business flow is very limited,” Major said. “This is a classic case of lots of trapped long positions,” he said, referring to investors speculating on a rise in prices.

Commerzbank AG analysts Marcel Bross and Peggy Jaeger said in an investor note today that liquidity is “disappearing almost completely.”

Germany sold 5.1 billion euros of new 3 percent 10-year bunds at an average yield of 2.97 percent today. Investors bid for 1.7 times the amount on offer, down from 2 times the amount at a March 17 auction.

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

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