German Bunds Rise on Joint Euro-Bond Rebuttal; Italian Securities Advance
Aug. 17 (Bloomberg) -- Nicolas Veron, a senior economist at Bruegel, discusses the prospects for a common euro-area bond following yesterday's meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy. He speaks from Washington with Andrea Catherwood on Bloomberg Television's "Last Word." (Source: Bloomberg)
German bunds rose after Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an increase in the euro area’s rescue fund and rebuffed calls for joint regional borrowing to stem the debt crisis.
Ten-year German bonds advanced for a third day and 30-year debt snapped a four-day decline, while Greek notes slid. Italian securities climbed as two people with knowledge of the transactions said the European Central Bank bought the nation’s debt. Germany sold 5.62 billion euros ($8.1 billion) of notes due in September 2013, while Portugal auctioned bills.
“If they had hinted at the introduction of euro bonds, that would have been a negative” for bunds, said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “They understand that would not be an appropriate solution because it would put the ratings of the stronger countries at risk. The market is taking this as a reason to buy into the core, particularly bunds.”
Ten-year bund yields fell nine basis points to 2.23 percent at 4:35 p.m. in London. The 3.25 percent security due July 2021 gained 0.830, or 8.30 euros per 1,000-euro face amount, to 108.90. Yields on 30-year bonds also dropped nine basis points, to 3.11 percent.
The leaders of Europe’s two biggest economies agreed yesterday to press for closer euro-area cooperation, tougher deficit rules and a harmonization of their corporate tax rates, while ruling out an expansion of the European Financial Stability Facility. They also proposed a plan for a financial- transaction tax.
‘More Specific’
“Many people were expecting something more specific and far reaching,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “The initial reaction has been lower yields in the core. There’s a bit of disappointment about the outcome.”
The door isn’t closed on eventual issuance of common euro bonds, though they aren’t the solution for the region’s current problems, European Commission spokesman Olivier Bailly told reporters today in Brussels. Germany would face extra costs of 47 billion euros a year if euro-region bond sales were introduced, the Munich-based Ifo economic institute said.
The yield on five-year Greek notes jumped 27 basis points to 18.56 percent. The five-year yield has climbed from as low as 15.67 percent on July 22, a day after euro-area nations agreed on a second bailout plan for the beleaguered country. The price of the securities was at 54.31 percent of face amount.
Investor Losses
The Institute of International Finance estimates investors would lose 21 percent under a debt-swap plan proposed for Greece, which aims to include 90 percent of investors.
“Further details on the Greek exchange/rollover plan are still in the works, it seems, and most recent indications are that the 90 percent level will be a tough one to pull off,” Padhraic Garvey, head of developed-debt market strategy at ING Groep NV in Amsterdam, wrote today in an e-mailed note.
Finland reached an agreement with Greece yesterday on receiving collateral to cover its contribution to the Mediterranean nation’s bailout and rejected any form of joint- regional liability such as selling common euro bonds.
“Smaller affluent countries are capable of rocking the boat just as much as the bigger ones, and Finland has been especially critical of bailouts,” Garvey wrote.
Italian bonds rose, pushing the two-year note yield to the lowest since July 7, as the ECB was said to buy the nation’s securities. It was at 3.27 percent, from 3.40 percent yesterday. The 10-year yield fell six basis points to 4.93 percent. Rates on similar-maturity Spanish bonds dropped to 4.94 percent, the least since Nov. 24.
German Auction
Germany auctioned the 0.75 percent two-year notes for an average yield of 0.73 percent, after offering as much as 7 billion euros of the securities for sale. The auction attracted bids for 1.4 times the amount of debt sold.
Germany last offered two-year notes on July 6 for an average yield of 1.55 percent, raising 3.4 billion euros and drawing bids for 2.26 times the amount sold. In the seven prior auctions this year, the nation paid an average 1.56 percent for two-year notes.
“The subdued demand reflects the stretched valuations at the short end, which focuses investors to move further and further out on the curve to generate the required return,” Michael Leister, a fixed-income strategist at WestLB AG in London, wrote in a report.
Portugal sold 172 million euros of bills due in February at an average yield of 4.989 percent, the debt agency said. That compares with a yield of 4.960 percent at a six-month auction on July 20. The government also auctioned 985 million euros of bills maturing in November at an average yield of 4.854 percent, down from a yield of 4.967 percent on Aug. 3.
German government bonds handed investors a 4.4 percent return this year, compared with 7 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have gained 5.3 percent, while Italian debt earned 0.6 percent. Portuguese securities lost 16 percent, the indexes show.
To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; 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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