Italian, Spanish Bonds Tumble as Contagion Worsens; German Bunds Advance

Photographer: Mario Proenca/Bloomberg

People read the morning headlines at a newspaper kiosk in Lisbon, Portugal. Close

People read the morning headlines at a newspaper kiosk in Lisbon, Portugal.

Close
Open
Photographer: Mario Proenca/Bloomberg

People read the morning headlines at a newspaper kiosk in Lisbon, Portugal.

Italian and Spanish bonds tumbled and German bund yields sank to a more than seven-month low as contagion from Greece’s debt crisis threatened to spread to bigger economies, stoking demand for the safest assets.

Ten-year Italian yields soared to the highest in 10 years. The spreads investors demand to hold Italian, Portuguese and Spanish debt over bunds widened to euro-era records. German Finance Minister Wolfgang Schaeuble said “there’s no discussion whatsoever” of doubling the European Union’s rescue facility after Die Welt reported yesterday that the European Central Bank is seeking to increase the pool to 1.5 trillion euros ($2.11 trillion) to cover an Italian crisis.

“There’s pronounced risk-off sentiment,” said Michael Leister, a fixed-income analyst at WestLB AG in London. “You can clearly see the market is worried. We are seeing a self- fulfilling prophecy, where yields increase due to contagion and then the market gets worried about the high funding costs, as do the rating agencies.”

Yields on 10-year Italian bonds increased for a sixth day, climbing 41 basis points to 5.71 percent, the most since 2000. The spread over German bunds widened to 303 basis points, a euro-era record. Spanish 10-year yields climbed 36 basis points to 6.04 percent, expanding the spread over German debt to as high as 339 basis points.

Record Spread

Portugal’s 10-year yield climbed 46 basis points to 13.39 percent, sending the spread over German bunds to as much as 1,071 basis points, or 10.71 percentage points.

Ten-year bund yields were 15 basis points lower at 2.68 percent as of 4:56 p.m. in London, after touching 2.65 percent, the lowest since Nov. 26, as investors sought the safest assets. Two-year German note yields declined 19 basis points to 1.26 percent after reaching 1.24 percent, the least since Jan. 25.

European stocks fell for a second day, the euro sank to a seven-week low against the dollar and 10-year Treasuries yielded the least this month as investors favored the safest assets.

“Contagion risk is increasing rapidly,” said Orlando Green, a fixed-income strategist at Credit Agricole SA in London. “The market’s concern is that if Europe can’t display unity on Greece, then how is it going to manage to deal with Italy, which has a much larger debt burden? The current rescue package is nowhere near big enough to cover an economy the size of Italy.”

Ministers Clash

European finance chiefs clashed over how to get private bondholders to maintain their exposure to Greek debt in a way that doesn’t prompt credit-rating companies to declare a formal default. A new package for Greece on top of the 110 billion euros pledged last year hinges on the EU finding a formula for getting investors to roll over Greek debt holdings so that governments don’t have to pick up the tab when bonds come due between 2012 and 2014.

Austrian Finance Minister Maria Fekter told reporters before a crisis meeting in Brussels today that forcing bondholder participation would be “fatal.” A lunchtime crisis- management session including European Union President Herman Van Rompuy, European Central Bank President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker preceded the regular ministerial meeting.

EU leaders are prepared to accept a Greek default on some obligations, the Financial Times said yesterday citing unnamed senior officials.

Default Swaps

Credit-default swaps protecting Italian bonds rose 28.5 basis points to an all-time high of 279.5, while contracts on Greece climbed 102 basis points to 2,275, Ireland increased 52 basis points to 972 and Portugal surged 40 basis points to 1,080, also records, CMA prices show.

Two-year Italian yields rose to a more-than two-and-a-half year high as the nation’s financial-market regulator moved to curb short selling after the benchmark FTSE MIB index plunged 3.5 percent on July 8. The slide was led by UniCredit SpA and other bank shares, which are among the largest holders of Italy’s debt.

The gap between Spanish and Italian 10-year bond yields narrowed to 35 basis points, the least since November. The spread was 49 basis points a week ago, according to data compiled by Bloomberg.

Yields on two-year Spanish bonds surged 48 basis points to 4.25 percent, the first time the yield has exceeded 4 percent since September 2008. The spread, or yield difference, between Belgian 10-year bonds and similar maturity German bunds widened 34 basis points to a euro-era record of 161 basis points.

Greek Yields

Greek 10-year bond yields increased 16 basis points to 17.02 percent, widening the spread or yield difference over similar maturity German bunds to as much as 1,437 basis points. Two-year Greek yields surged as much as 124 basis points to a euro-era record of 31.62 percent.

Irish 10-year bonds fell for a fourth straight day, lifting yields as much as 47 basis points to a euro-era record of 13.38 percent. Two-year Irish note yields also climbed to a record 18.44 percent.

The ECB is seeking advice from banks on what to do in the event of a sovereign default in the euro area, Handelsblatt reported, without saying where it got the information. The newspaper said the ECB has written to “more than five” financial institutions in recent days, requesting that they apply to act as advisers.

Italy is the euro region’s biggest bond market, with 1.8 trillion euros of outstanding debt as of Dec. 31, compared with 1.1 trillion euros of German debt outstanding on March 31, according to websites from the nations’ debt agencies.

The Mediterranean country plans to sell securities maturing in 2016, 2017, 2023 and 2026 on July 14. It hasn’t said how much it plans to sell. Greece will auction 1.25 billion euros of 26- week Treasury bills on tomorrow.

To contact the reporters on this story: Garth Theunissen in London at gtheunissen@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.