Portuguese, Irish Debt Lead Peripheral Drop on Budget Concern

Irish government bonds tumbled for a 13th day on mounting concern that the nation will be forced to restructure its finances.

Spanish bonds also headed for a 13th day of declines as data showed the nation’s economic growth stalled. French Finance Minister Christine Lagarde said yesterday that investors must share in the cost of safeguarding sovereign debt. German bunds advanced on demand for the safest assets, while Portuguese debt recovered from earlier losses. Italian bonds fell.

“Lagarde’s comments mentioned restructuring, and that’s another nail in the coffin” for so-called peripheral nations’ debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “There’s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.”

The yield on the Irish 10-year bond added 31 basis points to 9.07 percent at 4:18 p.m. in London. The 5 percent security maturing in October 2020 slipped 1.65, or 16.5 euros per 1,000- euro ($1,367) face amount, to 74.09. The decline extends the longest losing streak in at least three years.

Irish securities slid yesterday as clearing house LCH Clearnet Ltd. demanded its clients place a larger deposit when trading the debt. The Irish spread over bunds reached an all- time high of 652 basis points, or 6.52 percentage points, Bloomberg generic data shows.

Best Bids

The best bid for Irish 10-year bonds was 9.07 percent, or a price of 74.09, while the nearest offer was at 8.61 percent, or a price of 76.55, Bloomberg data show.

“The wide bid-offer spread indicates how thin trading has become, and reflects a lack of two-way market activity,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London.

For 10-year bunds, the difference between the bid and the offer was less than one basis point, the Bloomberg data show.

The euro weakened, stocks declined and the cost to insure Portuguese, Spanish and Irish sovereign debt from default rose to a record.

“All stakeholders must participate in the gains and losses of any particular situation,” Lagarde said during an interview in Paris for Bloomberg Television’s “On the Move” with Francine Lacqua. “There are many, many ways to address this point of principle.”

Portugal Pares Drop

Portuguese 10-year bonds pared a decline which earlier today widened the yield difference, or spread, over benchmark German bunds to as much as 484 basis points, a record, according to Bloomberg generic data. The spread was little changed at 459 basis points. The Portuguese 10-year yield was at 7.15 percent, down two basis points from yesterday.

Peripheral nations’ bonds have dropped since European Union leaders agreed on Oct. 29 to consider German Chancellor Angela Merkel’s proposal for a permanent rescue mechanism that would involve restructuring with losses for private holders of sovereign debt. The proposal is part of discussions to create a permanent crisis facility to replace the rescue fund created in May after Greece’s near-default.

Greek bonds erased declines which earlier today drove the Greek-German 10-year spread as wide as 930 basis points. That compares with the record 973 basis-point premium reached on May 7 before the European Union crafted a rescue package worth 750 billion euros. The 10-year Greek yield dropped three basis points to 11.68 percent.

CDS Prices Rise

The yield on the 10-year German bund, Europe’s benchmark, fell one basis point to 2.44 percent. The yield on 10-year Spanish bonds rose seven basis points to 4.60 percent.

The cost to insure Irish government debt against default rose 20 basis points to a record 617, according to data provider CMA, using credit-default swap prices. CDS’s on Portugal added 17 basis points to 494 and Spain’s rose 12 to 289.

Irish central bank Governor Patrick Honohan said he’s convinced the country will be able to return to bond markets in 2011 as the government steps up austerity measures to restore investor confidence.

Finance Minister Brian Lenihan’s plan involves 15 billion euros in savings over four years to reduce the deficit below the EU limit of 3 percent of gross domestic product by 2014. The deficit will be about 12 percent of GDP this year, or 32 percent of GDP when the costs of the banking rescue are included.

‘Calming Words’

“There is no reason why Ireland shouldn’t be able to go back to bond markets next year,” Honohan, who also sits on the European Central Bank’s 22-member Governing Council, told Bloomberg Television in an interview in Dublin yesterday. “It takes time for markets to be reassured. It takes more than calming words from me or others.”

Spanish bonds stayed lower as data showed the nation’s economy stalled in the third quarter as the deepest austerity measures in three decades undermined the recovery from an almost two-year recession.

Gross domestic product was unchanged from the previous three months after two quarters of expansion, the National Statistics Institute in Madrid said, confirming a Nov. 5 estimate by the Bank of Spain. The economy expanded 0.2 percent from a year earlier, the first annual increase in two years.

Spanish Spread

The Spanish-German 10-year yield spread widened to 215 basis points today from 206 yesterday. That’s still below an intraday euro-era high of 232 basis points reached on June 17.

The Italian 10-year bond fell for a sixth straight day, its longest run of declines since June, before the nation sells as much as 8.25 billion euros of 2015, 2026 and 2034 debt tomorrow.

The spread against bunds was at 176 basis points, up from 166 basis points yesterday. That compares with a peak of 185.5 basis points reached on June 8.

“Italian paper has been under pressure recently on a combination of periphery woes and political uncertainty,” Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, wrote in an e-mailed report today. “We expect demand at tomorrow’s auction to be good,” with “support from the current level of spread,” she said.

Bunds have returned 8.5 percent this year, the same as U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt lost 18.7 percent, Portuguese bonds lost 10.6 percent and Irish securities declined 14.3 percent, the indexes show.

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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

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