Italian, Spanish Government Bonds Drop as Greek Default Concern Persists
Italian and Spanish two-year notes declined on speculation European leaders’ agreement to give Greece more cash in return for additional liquidity won’t stop the debt crisis from spreading.
The extra yield, or spread, that investors demand to hold Italian 10-year debt instead of German bunds of similar maturity widened to a euro-era record. Moody’s Investors Service said yesterday it may downgrade 13 Italian banks. German 10-year bonds rose even as a report showed business confidence unexpectedly improved.
“People are genuinely risk-off, and that’s not going to go away quickly,” said Peter Schaffrik, head of European fixed- income strategy at RBC Capital Markets in London.
The Italian two-year note yield rose 11 basis points to 3.28 percent as of 3:17 p.m. in London, after reaching the most since Nov. 30. Losses by the nation’s 10-year bonds pushed the spread over German bunds as wide as 213 basis points. Spanish two-year yields added nine basis points to 3.69 percent.
The yield on the Greek 10-year bond was nine basis points lower at 16.78 percent, while two-year note yields were 35 basis points lower at 28.29 percent after climbing above 30 percent last week. Greek 10-year bonds yielded 1,394 basis points more than their German counterparts. The spread increased to 1,503 basis points on June 16.
IFO Index
German notes declined earlier as the Ifo institute in Munich said its June business climate index rose to 114.5 from 114.2 in May. Economists expected business confidence to drop to 113.4, the median of 39 predictions compiled by Bloomberg News before the release showed.
“The data shows a lot of resilience in the German economy and solid growth for the months ahead,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “We would expect bund yields to have potential to rise, just from the economic conditions. Of course for the short term, there are other factors driving the market.”
Yields on German two-year notes fell two basis points to 1.35 percent, and slipped earlier to the lowest since Feb. 18. They jumped by as much as five basis points, the most since June 17, after the Ifo report. The 10-year yield fell two basis points to 2.84 percent. It was 2.96 percent last week.
Bond Returns
German government bonds have handed investors 0.9 percent this year, while Treasuries returned 3.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds have shed 19 percent, while Portugal lost investors 21 percent.
Europe’s leaders said after a summit in Brussels that they would stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of austerity next week.
Holders of Greek debt have a “very high interest” in achieving a solution to the current crisis rocking the euro area, German Finance Ministry spokesman Martin Kotthaus said. Talks with banks and insurers on rolling over their Greek debt are ongoing and “discretion” is required during the negotiations, Kotthaus told reporters in Berlin today.
Thomas Robopoulos, a lawmaker for Greece’s ruling Pasok party, said he hasn’t decided whether he will vote for the government’s medium-term fiscal plan and implementation law in Parliament next week. Papandreou survived a confidence motion this week with no support from the opposition.
“I still fail to see how a second bailout and voluntary involvement by investors is going to avoid a default” being declared by ratings companies, said Elisabeth Afseth, an analyst at Evolution Securities Ltd. in London. “Unless the EU are happy to provide all the funding for a pretty much unlimited time, then it’s very hard to see how you get anything else.”
Irish 10-year yields jumped 16 basis points to 11.95 percent, pushing the spread over similar maturity German bunds to 913 basis points, the most since the euro’s introduction.
To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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