Irish, Italian Government Notes Flip-Flop After Germany Curbs Short Sales

Ireland, Italy and Portugal government notes flip-flopped between gains and losses as Germany’s plan to curb market speculation spurred traders to reduce bets the bonds would fall.

Irish two-year notes rose, cutting the yield by 9 basis points to 2.07 percent. Yields on 10-year Italian debt fell 2 basis points to 3.88 percent, while those on Portugal’s bonds were little changed at 4.7 percent. The securities had both declined as much as 9 basis points.

“That’s very much a short-term reaction,” said Gary Jenkins, head of credit strategy in London at Evolution Securities Ltd. “Get your liquidity while you can.”

German Chancellor Angela Merkel roiled markets by stopping traders buying default protection on or selling government bonds they don’t own. While the ban doesn’t require traders to close old positions some investors may reduce them anyway because of uncertainty, said Jenkins.

The German plan doesn’t address investors’ longer-term concerns that governments will have trouble cutting their record budget deficits, Jenkins said.

“It’s just ignoring the basic fact that governments raise money via the traditional cash bonds and investors are not overly keen on buying those right now,” he said. “Unless they sort that out this will be seen as an irrelevance.”

To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net

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