German 10-Year Yield Drops Below 3%; IMF May Withhold Greece’s Bailout Aid

German government bonds rallied a Luxembourg Prime Minister Jean-Claude Juncker said the International Monetary Fund may not release its portion of aid for Greece next month, boosting demand for the safest assets.

The price gains pushed the yield on the 10-year bund below 3 percent for the first time in four months, while the two-year note yield slipped to a two-month low. Juncker told a conference in Luxembourg he didn’t think the IMF, European Union and European Central Bank were confident Greece could honor its debt commitments over the next 12 months, one of the “rules” governing whether aid funds would be released. Greek, Spanish and Portuguese bonds held gains.

“Definitely this would be a further step towards the worsening of the crisis if the IMF were not to support the Greek program for the time being,” said Kornelius Purps, an interest- rate strategist at UniCredit SpA in Munich. “This is the reason behind the bid in the bund market. It’s simply once again a hit in the back and we’re risk off for the moment.”

The 10-year bund yield fell five basis points to 3 percent as of 4:44 p.m. in London. It reached 2.99 percent earlier, the lowest since Jan. 12. The 3.25 percent security due 2021 rose 0.465, or 4.65 euros per 1,000-euro ($1,413) face amount, to 102.180. Two-year yields were also five basis points lower, at 1.61 percent, the lowest since March 18.

Relative Safety

“There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Juncker said. “I don’t think that the troika will come to the conclusion that this is given,” he said, referring to the IMF, EU and ECB.

Investors have favored the relative safety of German debt this quarter as the euro-region’s sovereign-debt crisis threatens to worsen, sending yields on the debt of Greece, Portugal and Ireland to record highs.

German government bonds have handed investors a return of 2.1 percent since the end of March, trimming this year’s loss to 0.3 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek debt has lost 14 percent this year, Irish debt 9.1 percent and Portuguese bonds 15 percent. Treasuries returned 2.2 percent.

Greek bonds stayed higher after Juncker’s comments, with the 10-year yields falling 35 basis points to 16.38 percent. The spread between Greek 10-year debt and similar-maturity German bunds narrowed 29 basis points to 1,338 basis points, or 13.38 percentage points.

Chinese Purchases

Two-year Greek yields declined by 91 basis points to 25.11 percent, reversing a 76 basis-point surge to 26.78 percent at the market’s open. Spanish 10-year bond yields dropped six basis points to 5.30 percent, while Portuguese 10-year yields fell 11 basis points to 9.62 percent.

China may account for a “strong proportion” of demand for Portuguese bailout bonds when the European Financial Stabilization Mechanism rescue fund begins selling them in June, Klaus Regling, chief executive officer of the European Financial Stability Facility, was quoted by the Financial Times as saying yesterday.

Gains in so-called peripheral euro-nation debt today are occurring “principally on the back of the FT article that China is looking at purchasing” the bonds said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “We would still caution against the feel-good factor.”

Asian Investors

Investors from Asia and the Middle East bought 23 percent of the 4.75 billion euros of five-year notes sold yesterday to help fund Portugal’s bailout, the European Commission said. The sale was the second in two days enabling the fund to complete its announced transactions for the second quarter, the EC said.

Following the sales, disbursements to Ireland and Portugal will be made next week.

“I believe Europe has found the right response to reshape the supervisory architecture, to strengthen economic governance and to set up a permanent crisis mechanism in one comprehensive approach,” Regling said today at a conference in Luxembourg, adding that the risk of contagion in the 17-member bloc had been contained.

IMF European Director Antonio Borges said the fund is in talks with the Greek government on their fiscal program and a decision on the next tranche of aid will be made once the review is completed.

‘Normal Procedure’

“We have a mission in Greece right now, negotiating with the government on the terms of the normal review of the program, so a decision will be made when they conclude their work,” Borges told reporters at a conference in Paris today. “This is the normal procedure of the IMF.”

Former ECB Chief Economist Otmar Issing said Greece will probably be unable to meet its obligations as the euro region’s most indebted nation is “insolvent.” While it is “not physically impossible” for Greece to honor its obligations, repayment is unlikely, he said today at a press conference hosted by Nykredit A/S in Copenhagen.

“I’m skeptical about Greece,” said Issing, who joined the ECB a year before the euro’s inception in 1999 and stayed there until 2006. “Greece is not just illiquid, it’s insolvent.”

After paying 417 million euros of debt due on May 31, Greece needs to repay 4.025 billion euros maturing in July, as well as 8.715 billion euros of debt due in August, according to data compiled by Bloomberg. The Mediterranean nation faces redemptions that total more than 49 billion euros by March next year, before taking interest payments into account.

Italian Sales

Italian 10-year bonds gained for a third day, reducing yields by two basis points to 4.71 percent. The Bank of Italy said the government sold 8 billion euros of 183-day Treasury bills at an average yield of 1.657 percent. Investors bid for 1.70 times the amount of securities on offer, up from a so- called bid-to-cover ratio of 1.43 at the previous auction of similar-maturity debt on April 26, which was allotted at 1.659 percent.

Italy is scheduled to sell up to 1.5 billion euros of index-linked securities maturing in 2021 tomorrow.

Irish 10-year bond yields were five basis points higher at 11.04 percent, after earlier reaching a euro-era record 11.07 percent.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

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