Greek Bond Yields Climb to Record High on Speculation Bailout Will Fail

Greek bonds slumped, with 10-year yields rising for an eighth day to a euro-era record, amid concern Finland’s demands for loan collateral jeopardize Greece’s second bailout package and may trigger a default.

German two-year notes gained after a U.S. report showed initial jobless claims unexpectedly increased last week, fueling concern the world’s largest economy is slowing and spurring demand for the safest assets. The spread between Greek and German 10-year yields widened to as much as 1,632 basis points, also the most since the euro was introduced in 1999. The benchmark Stoxx Europe 600 Index fell 1.2 percent.

“Markets are doubting whether the second bailout package will ever be ratified by all the euro-region member states,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “There’s not much that can worsen the situation from where we are now.”

Greek 10-year bond yields rose 45 basis points to 18.34 at 4:33 p.m. in London, after climbing as high as 18.55 percent. The 6.25 percent security due in June 2020 fell 1.16, or 11.60 euros per 1,000-euro ($1,437) face amount, to 48.970.

The two-year yield jumped 184 basis points to 45.87 percent, extending a 5.6 percentage point increase over the past two days. It earlier reached a euro-era record 45.91 percent.

The cost of credit-default swaps insuring Greek debt rose three basis points to 2,253 basis points, the highest in more than a month, according to CMA.

Jobless Claims

U.S. jobless claims climbed by 5,000 to 417,000 in the week ended Aug. 20, the Labor Department said in Washington. Economists surveyed by Bloomberg News projected a drop to 405,000, according to the median forecast.

Finland’s Finance Minister Jutta Urpilainen said the nation won’t give in to demands to abandon the deal it struck with Greece over collateral in exchange for bailout loan guarantees.

“If the Finnish and Greek deal isn’t acceptable to others, it’s now up to all euro members to together build a model that all find acceptable,” Urpilainen wrote today in an e-mailed statement. The collateral demand was “no surprise” and will be maintained, she said.

Greece received a three-year, 110-billion-euro rescue from the European Union and International Monetary Fund last year. The nation sought a second package this year as its economic woes stymied plans to return to the capital markets in 2012.

Official Pledges

Pledges of 365 billion euros in official loans to Greece, Portugal and Ireland, as well as at least 96 billion euros of bond purchases by the European Central Bank, have yet to fix the finances of those countries or prevent speculative attacks on Spain and Italy.

The ECB bought Spanish government bonds today, according to three people with knowledge of the transactions, extending this month’s purchases to restrain the nation’s borrowing costs.

The central bank also scooped up Italian debt, two of the people said, asking not to be identified because the deals are confidential. An ECB spokesman declined to comment. The central bank was also said to buy Spanish and Italian debt yesterday.

Spain’s 10-year bonds gained, pushing the yield on the securities two basis points lower to 4.99 percent, while the two-year note yield fell seven basis points to 3.25 percent.

Italy’s 10-year yields were little changed at 5.05 percent, while two-year yields added two basis points to 3.36 percent. The nation plans to sell 8.5 billion euros of six-month bills and 2 billion euros of two-year zero-coupon bonds tomorrow.

ECB Buying

The ECB has bought government bonds in each of the past three weeks in a bid to stave off contagion from Greece, Ireland and Portugal and bring 10-year yields from Spain and Italy below 5 percent. Yields of both nations’ debt had surged to euro-era records at the start of this month.

The yield on Germany’s 10-year bund fell two basis points to 2.19 percent, after earlier rising to 2.28 percent, the highest for a benchmark security since Aug. 17. Two-year yields dropped six basis points to 0.66 percent.

Bunds dropped earlier amid speculation Federal Reserve Chairman Ben S. Bernanke will outline additional measures to help the U.S. economy at the central bank’s annual symposium in Jackson Hole, Wyoming.

German government bonds have returned 5.4 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned a gain of 6.7 percent. Greek bonds have lost 22 percent, the indexes show.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net

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