Portuguese Bonds Lead Irish, Italian Debt Slump After Downgrade

Portugal’s bonds plunged after Moody’s Investors Service cut its credit rating, sending yields to records and leading losses across Europe’s most indebted nations on concern the region’s debt crisis is spreading.

Irish securities slumped, Spanish bonds fell for a third straight day and the 10-year Italian yield soared to the highest since November 2008 as Germany revived its proposal for a Greek bond swap involving private investors. German two-year notes rose the most in almost two weeks as demand rose at a sale of 3.38 billion euros ($4.8 billion) of the securities. Portugal may not be able to fund itself from financial markets without more international support, Moody’s said.

“Portugal is under considerable pressure as it leads another peripheral leg down,” said Richard McGuire, a senior fixed-income strategist at Rabobank International. “Underpinning this move is arguably not so much the Moody’s downgrade, but the comments accompanying this action, specifically the note that a further bailout and some form of private-sector support are increasingly likely.”

The yield on 10-year Portuguese bonds rose 205 basis points to a record 13.07 percent as of 4:52 p.m. in London after touching a record 13.09 percent. The 3.85 percent securities maturing in April 2021 fell 7.63, or 76.30 euros per 1,000-euro face amount, to 50.695. The additional yield investors demand to hold the bonds instead of benchmark German bunds reached a record 1,014 basis points.

Two-year Portuguese yields surged 380 basis points to 16.75 percent. The nation’s borrowing costs increased at an auction of 848 million euros of three-month bills today, rising to an average 4.926 percent from 4.863 percent at a sale on June 15.

Index Removal Threat

The cost of insuring against default on Portuguese sovereign debt surged 165 basis points to a record 936 basis points, according to CMA prices for credit-default swaps.

Moody’s cut the long-term government bond rating for Portugal to Ba2, or junk, from Baa1, and said the outlook is negative. Discussions to involve private investors in a new rescue plan for Greece make it more likely that the European Union will require the same pre-conditions in the case of Portugal, Moody’s said in a statement.

Portugal’s government bonds will be excluded from Markit iBoxx Euro Area Benchmark indexes at the end of the month, the company said today on its website.

Greek 10-year yields jumped 272 basis points last June as the nation’s debt was ousted from indexes run by Citigroup Inc., Barclays Plc and the Markit iBoxx Euro Sovereign Index.

Ireland may also face an “imminent” downgrade, NCB Stockbrokers wrote in a report today. The two-year Irish yield surged 242 basis points to 15.30 percent.

Greek Rollover Plan

A new proposal on investor participation in a Greek aid plan was to be discussed in Paris today, the Financial Times said, citing two people involved in the talks. Germany planned to revive a proposal for a bond swap to lengthen Greek bond maturities, while the head of the biggest group of international financial companies recommended buybacks of outstanding Greek securities. The competing ideas underscore how investors and government officials are struggling to devise a role for creditors in a bailout of Greece without triggering a default.

The yield on 10-year Italian securities advanced 12 basis points to 5.12 percent, pushing the difference in yield, or spread, to similar-maturity German debt 21 basis points wider to 219 basis points. Spanish 10-year yields rose 12 basis points to 5.61 percent, increasing the spread over bunds to 269 basis points.

The yield on Greek two-year bonds increased 153 basis points to 28.44 percent.

CDS Index

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 21 basis points to 250. An increase signals deteriorating perceptions of credit quality.

“The downgrade creates bad sentiment generally,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “There are signs it’s infecting people across the market. The flight-to-quality bid is pretty strong.”

Ten-year bund yields fell seven basis points to 2.93 percent. Two-year German note yields also slid, falling six basis points, to 1.58 percent. Demand at today’s sale of two- year notes was 2.3 times the amount sold, the highest so-called bid-to-cover ratio since June 2010.

It was a “stellar” auction, Michael Leister, a fixed- income analyst at WestLB AG in London, said by e-mail. “The safe-haven bid is in full swing.”

The front German bund futures contract rose 0.7 percent to 126.48. German securities extended their advance as China raised benchmark interest rates for the third time this year.

German bonds returned 0.1 percent this year, compared with 2.6 percent for U.S. Treasuries and 2.1 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds handed investors a loss of 15 percent, while Portuguese securities lost 19 percent, the indexes show.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net;

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

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