Greek Bonds Slump on Budget Concern; Bunds Rise on Safety Bid

Greek bonds fell, leading weekly declines by securities from Europe’s periphery, as concern the nation will struggle to meet deficit targets pushed the extra yield over German securities to the highest in a month.

German bunds gained on concern a proposed European Union measure to limit debt crises may penalize investors, encouraging demand for safer assets. Portuguese bonds capped a weekly loss as a survey showed the opposition Social Democrats increased their poll lead over Prime Minister Jose Socrates’ Socialists.

“The periphery remains vulnerable,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “Greece is still suffering.”

The yield on Greece’s 10-year bond rose 19 basis points, or 0.19 percentage point, to 10.68 percent at 4:01 p.m. in London. The extra yield, or spread, that investors demand to hold the securities instead of benchmark German bonds was at 809 basis points, the widest level since Sept. 30 based on closing prices. The spread hadn’t been above 800 basis points since Oct. 1.

German Chancellor Angela Merkel won European Union backing for a rewrite of EU treaties to create a permanent debt-crisis mechanism by 2013 to prevent a repeat of the Greece-led shock that jolted the euro.

Merkel’s plan foresees an extension of debt maturities, suspension of interest payments and a waiver on creditors’ claims, the Handelsblatt newspaper reported yesterday, citing an unidentified government official.

‘Default Regulation’

Such a proposal might be seen as “a step toward government default regulation,” said Christoph Kind, who helps invest about $20 billion as head of asset allocation at Frankfurt Trust in Frankfurt. “The market is pricing in the danger that this is going to be realized at some point.”

Greece is likely to default within the next three years because budget-cutting measures won’t be enough to reduce the nation’s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said at a New York conference this week.

Portugal’s 10-year bond yield rose one basis point to 6.03 percent. The spread over similar German securities was 342 basis points after earlier climbing above 350 basis points, the widest since Oct. 14.

A survey published today by Portugal’s Catholic University indicated 40 percent backing from voters for the Social Democratic Party, 3 percentage points higher than in a June survey, Diario de Noticias reported today. The Socialists had 26 percent support, 8 percentage points less than in the previous poll, according to Diario.

Budget Proposals

The Social Democrats will consider any proposals the government may still make regarding its 2011 budget, leader Pedro Passos Coelho said in a conference today. Prime Minister Jose Socrates said yesterday the government would make an effort to reach an agreement.

“There are a lot of event risks coming up, with the Portuguese budget and the Greek local elections,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole SA in London. “In terms of the EU, this brings something else into the ball game.”

The German 10-year bund, Europe’s benchmark security, gained today, pushing the yield down four basis points to 2.53 percent. The yield was still headed for its first back-to-back monthly gains since May 2009. Bunds were supported by speculation that the Federal Reserve will resume buying debt.

Peripheral Nations

Debt of the peripheral nations gained earlier this month as optimism that the region’s recovery would be sustained eased concern that the nations would default.

German bonds have lost 1.3 percent this month, compared with a 0.5 percent decrease for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portugal’s securities gained 2.7 percent, while those of Greece returned 0.7 percent.

Euro-area countries sold 70 billion euros ($97 billion) of bonds in October, meaning they have covered 90 percent of their funding needs for the year, according to UniCredit SpA.

The new supply compared with 90 billion euros in September and pushed total sales for the year so far to 870 billion euros, Chiara Cremonesi, a market strategist at UniCredit in London, wrote in a client note today.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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