Greek-German 10-Year Yield Premium Narrows to Less Than 700 Basis Points
Greek bonds rose after International Monetary Fund Managing Director Dominique Strauss-Kahn said the lending institution is ready to give the nation more time to repay loans should European countries do so first.
The extra premium, or spread, investors demand to hold Greek 10-year bonds over benchmark German bunds shrank below 700 basis points for the first time since June 22. Greek officials are doing “exactly what they need to do” to rein in spending and meet benchmarks set out as a condition of aid, Strauss-Kahn said in a television interview with Bloomberg HT yesterday.
“We are continuing to hear good news from the likes of Ireland, Portugal, Spain and Greece in terms of budgetary transparency, and that’s driving spreads tighter,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London. “The more time Greece has to repay its IMF loans, the better.”
Greek 10-year bond yields fell 49 basis points to 9.28 percent as of 5:31 p.m. in London. The 6.25 percent security due June 2020 gained 2.62, or 20.62 euros per 1,000-euro ($1,394) face amount, to 81.03. The yield spread over bunds narrowed 51 basis points to 701 basis points, Bloomberg generic data shows.
German 10-year bund yields were 1 basis point higher at 2.27 percent. Two-year yields were little changed at 0.79 percent. The Spanish-German yield spread narrowed 3 basis points to 171 basis points. The Portuguese-German spread fell 11 points to 387 points and the Irish spread dropped 5 points to 417.
German Opposition
Chancellor Angela Merkel’s government opposes any move to grant Greece more time for repayment, the German Finance Ministry said.
Any such move would be “premature” given that Greece needs to show it can implement its deficit-reduction program over time and ensure there is “no doubt” about the quality of its statistics, Bertrand Benoit, a spokesman for the ministry, said by phone today.
Portuguese banks’ financing from the European Central Bank declined 19 percent to 39.7 billion euros in September from August, the Bank of Portugal said today. Borrowing by Irish- based credit institutions, including international and domestic companies, increased to 119.1 billion euros as of Sept. 24 from 95.1 billion euros at the end of July, the central bank said at the end of last week.
‘Buy Peripheral Bonds’
Deutsche Bank AG advised investors to buy Italian and Spanish two-year notes versus so-called core European government debt securities as concern fades that the region’s sovereign- debt crisis will spread to the two Mediterranean nations.
There is “far less concern about a systemic problem in euro-area sovereigns today,” Abhishek Singhania, a London-based strategist, wrote in a report dated Oct. 8. “The larger peripherals such as Italy and Spain still offer considerable carry over funding costs.”
Morgan Stanley last week recommended buying Spanish, Italian and French government bonds, while staying short, or betting on a decline, in Irish and Portuguese debt.
“Two-way risk has returned to peripherals spreads, in our view, prompting us to recommend a tactical reduction in underweights,” Laurence Mutkin, a managing director at Morgan Stanley & Co. International in London, wrote in the note published Oct. 8. “There are now significant risks to being underweight Spain, Italy and France, because of their yields, volatilities and weights in the index.”
German Bill Sale
German borrowing costs rose at a sale of 4.5 billion euros of 6-month Treasury bills today after money-market rates increased following weaker demand at a European Central Bank tender last month. Germany’s federal government sold the bills at an average yield of 0.614 percent, compared with 0.4148 percent at the last sale on Sept. 13.
Euribor and eonia rates, which measure how much lenders charge each other for loans, jumped after banks demanded 104 billion euros of 3-month loans from the ECB on Sept. 29 and 225 billion euros of longer-term loans matured. Three-month Euribor climbed to 0.977 percent today, according to the European Banking Federation, the most since July 15, 2009.
Slovakia sold 149.3 million euros of floating-rate bonds due Oct. 2013 today for an average price of 98.259. The sale attracted bids worth 4.02 times the securities offered, the Debt and Liquidity Management Agency said.
German bonds have returned 2.2 percent since June 30, compared with 3.2 percent for U.S. Treasuries and 4 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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