German Bonds Rise; Spanish, Italian Bonds Decline on Greek Default Concern
July 4 (Bloomberg) -- Simon Ballard, senior credit strategist at RBC Capital Markets, talks about the warning from Standard & Poor's that the debt rollover plan for Greece may temporarily place the country in "selective default." He speaks with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)
German bonds rose, snapping a five- day decline, after Standard & Poor’s said European efforts to roll over Greek debt may constitute a default.
Spanish and Italian bonds fell as S&P said a French proposal to swap maturing Greek debt for new securities would qualify as a distressed exchange because it offers creditors less than originally promised, possibly prompting a “selective default” rating. Greek two-year notes climbed amid speculation the European Central Bank will continue to accept the nation’s government bonds as collateral.
“The S&P news is weighing on sentiment,” said Michael Leister, a fixed-income analyst at WestLB AG in London. “The treatment by ratings agencies of any Greek bailout or rollover plan is crucial given the secondary effects if they were to deem it a credit event. We are seeing bunds up, so it clearly indicates that the risk-on sentiment is losing momentum.”
Ten-year bund yields fell two basis points to 3.02 percent as of 4:34 p.m. in London. They reached 3.05 percent on July 1, the most since June 9. The 3.25 percent security due July 2021 gained 0.125, or 1.25 euros per 1,000-euro ($1,453) face amount, to 101.945. Two-year German note yields were little changed at 1.66 percent. They reached 1.67 percent on July 1, also the most since June 9.
Factory Prices
Bunds stayed higher as a report showed European producer- price inflation slowed more than economists forecast in May. Factory-gate prices in the euro region increased 6.2 percent from a year earlier after rising 6.7 percent in April, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 6.3 percent, according to the median of 21 estimates in a Bloomberg News survey.
Greek two-year notes rose amid speculation that the ECB will continue to accept Greek government debt as collateral, even if S&P deems the nation in “selective default” if a bond rollover deal is struck, maintaining a lifeline to the nation’s banks. The ECB declined to comment on the S&P release.
Greece’s two-year note yields fell 81 basis points to 26.03 percent. Its 10-year government bond fell, pushing the yield up 11 basis points to 16.45 percent.
“It is difficult to think of the ECB precipitating the kind of crisis for Greece in which it wouldn’t take their bonds as collateral,” said Luca Jellinek, head of European interest- rate strategy at Credit Agricole CIB in London. “To the extent the Greek government bonds are OK, that would indicate the market thinks a way will be found to get the ratings agencies to not consider the Greek paper defaulted or that the ECB will say that they will accept this paper.”
Greek Spread
The yield difference, or spread, between Greek 10-year bonds and German bunds of similar maturity widened 15 basis points to 1,345 basis points.
Spanish and Italian bonds trimmed last week’s gains. The declines pushed the yield on Spain’s 10-year security two basis points higher to 5.40 percent, while the yield on Italian debt of similar maturity advanced four basis points to 4.91 percent. Irish 10-year bond yields fell four basis points to 11.58 percent, after climbing seven basis points to 11.67 percent earlier.
The yield difference between Spanish 10-year bonds and German securities of similar maturity, widened four basis points to 238 basis points, after narrowing 50 basis points last week. The Italian-German 10-year bond spread widened seven basis points to 190 basis points.
Austerity Plan
Bonds from Europe’s most indebted nations jumped last week, while bunds declined, after the Greek parliament backed an austerity plan aimed at winning more international aid and forestalling default. On July 2, European finance ministers authorized an 8.7 billion-euro loan payout to Greece by the middle of this month.
“If Greek paper is doing OK, it’s probably because they’ve bought some time with the additional aid and the imminent risk of a default has subsided,” said Charles Diebel, head of market strategy at Lloyds TSB Bank Plc in London.
German notes may fall this week as the European Central Bank raises borrowing costs. The ECB will lift its refinancing rate to 1.50 percent from 1.25 percent on July 7, according to the median estimate of 54 economists in a Bloomberg survey.
ECB President Jean-Claude Trichet reiterated on June 30 that policy makers are in a state of “strong vigilance” against inflation, a phrase he has used before previous monetary policy tightening. The central bank raised its key rate in April by a quarter point to 1.25 percent, the first increase in almost three years.
“It’s widely discounted that the ECB will raise rates,” Diebel said. “The market action will depend on how hawkish the tone is in the statement, and whether people think there are more rate increases coming this year.”
German government bonds handed investors a loss of 0.1 percent this year, compared with a return of 2.3 percent for U.S. Treasuries and a 1.7 percent gain for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds have lost almost 16 percent, the indexes show.
To contact the reporter on this story: {Emma Charlton} in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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