European Crisis May Mark End of ‘Homogeneous’ Yields, Data Show
The widest divergence in European bond spreads since the 1990s shows an $896 billion government bailout is failing to quell concern that Greece’s debt crisis will spread.
The difference in yield between Spanish 10-year government bonds and German bunds has surged to 204 basis points, or 2.04 percentage points, while investors demand 177 basis points more to hold comparable Italian debt, according to data compiled by Bloomberg. That’s the most in more than 12 years. (To see the Interactive Insight version of this story, click here.)
Europe’s debt crisis is worsening even after policy makers announced a 750 billion euro rescue plan last month, according to CLSA Asia Pacific Markets’s Chris Wood, the second-ranked Asia strategist in Institutional Investor’s 2009 survey. Concern increased last week after a spokesman for Hungary’s Prime Minister Viktor Orban said speculation the nation will default “isn’t an exaggeration.”
“We’ve moved into a different world where sovereign risk is a real risk and you’re paid to stick with sovereigns that look a lot stronger,” said David Scammell, who manages about $7.3 billion as a European government bond fund manager at London-based Schroders Plc. “You’re not meant to be in Greece or Portugal or Spain.”
Traders have snapped up German debt as a haven, driving yields on 10-year bunds to the lowest since at least 1989, according to data compiled by Bloomberg. Investors are speculating that budget deficits that exceed 10 percent of gross domestic product in Greece, Ireland, Spain and the U.K. will force spending cuts that will curb global growth.
Investors are rejecting the notion held from 2003 to 2007 that also euro-zone nations carry similar risk. During that period, the spread between yields on 10-year debt in Greece, Portugal, Italy, Ireland and Spain averaged 13 basis points more than German bonds. That compared with the 60-basis-point premium versus Treasuries for U.S. corporate debt with the top credit grades at Standard & Poor’s, Moody’s Corp. and Fitch Ratings, according to data compiled by Bloomberg. Now, the average difference for the European nations is 292 basis points.
Greece, Portugal and Spain had their credit ratings cut by S&P in April, boosting speculation the crisis is worsening. Last week, a spokesman for Orban said the country’s economy is in a “very grave situation.” Officials reversed course over the weekend, saying there was no danger of default after it spent two days telling the world the nation was at risk of a Greece- like crisis.
“Investors almost saw the sovereign risk as homogeneous,” said Huw Worthington, a strategist at London-based Barclays Plc who noted that investors assumed the European Union’s emphasis on fiscal responsibility would correct each government’s habit of borrowing and spending more.
Italy’s credit rating was cut to A+ at S&P in 2006, putting it four notches below Germany. The two nations having similar bond yields “didn’t make any sense,” Worthington said.
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