Greek Yields Rise Over 95 Percent on Default Concern; French Bonds Decline
Greek two-year yields climbed above 95 percent for the first time as Europe’s leaders prepared to tell the nation there is no alternative to the budget cuts agreed on under its international rescue plan.
Germany sold five-year notes at a record-low yield as investors sought safer securities amid concern Greek Prime Minister George Papandreou’s referendum on the bailout will exacerbate the region’s debt crisis. The European Financial Stability Facility said it will delay a planned bond sale because of market conditions. The additional yield investors demand to hold 10-year French debt instead of German bunds widened to a euro-era record.
“Markets don’t like the uncertainty,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Higher-growth markets, gilts, Treasuries and bunds, have flown over the past few days and although they’ve had a bit of a setback now, there’s still an underlying safety bid.”
The two-year Greek yield jumped 942 basis points, or 9.42 percentage points, to 96.70 percent at 4:34 p.m. London time, after rising as high as 96.72 percent. The price of the 4 percent note due in August 2013 slid 2.785, or 27.85 euros per 1,000-euro ($1,377) face amount, to 32.595.
Papandreou is due to meet with European leaders today after winning cabinet approval for his plan to put the international bailout to the public. He is also facing a parliamentary confidence vote this week. The rescue strategy includes a voluntary 50 percent loss for holders of Greek bonds.
Aid Installment
The referendum process may hinder the next installment of aid funds for Greece by the International Monetary Fund and the European Union, Dutch Finance Minister Jan Kees de Jager said. European lenders won’t swap their holdings of Greek debt until the country has held the referendum and enough banks have agreed to the 50 percent writedown to reach a 90 percent participation rate, the BdB Association of German Banks said.
The price of Greek bonds due October 2022 fell to 29.54 percent of face value, pushing the yield up to 25.47 percent. Thirty-year bonds slid to 27.445 to yield 17.21 percent.
“If there was certainty that all you will get is a 50 percent haircut, the market would trade there in an instant,” Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London, said yesterday. “A 50 percent recovery value is not a given and there are risks and unknowns priced in across the curve. You don’t know how they will be redeemed. One of the risks is that it could be in a different currency.”
Record Low
The EU’s plan for recapitalizing banks, part of a package of measures agreed on with the Greek debt swap last week, has “serious problems” that will hurt economic growth and make it harder for some nations to borrow, the Institute of International Finance said today. Charles Dallara, the institute’s managing director, said he sees no need to extend the Greek debt-reduction package to other countries.
Germany sold 4 billion euros of five-year notes at a yield of 1 percent. The Bundesbank said it received total bids for 6.08 billion euros, more than its maximum sales target of 5 billion euros. The nation last sold five-year notes on Sept. 28, when it paid an average yield of 1.22 percent.
Ten-year bund yields rose seven basis points to 1.84 percent after they dropped 26 basis points yesterday, a record decline. They outperformed similar-maturity French securities, with the yield difference widening to 130 basis points, the most since the euro was created in 1999.
‘Key Short’
French bonds are a “key short,” meaning investors should bet on lower prices, Andrew Roberts, head of European rates strategy at Royal Bank of Scotland Group Plc in London, wrote in an investor note today. “Markets rightly are coming strongly to this view.”
France plans to sell as much as 7 billion euros of bonds due between 2016 and 2021 tomorrow, while Spain will auction up to 4.5 billion euros of debt.
The ECB governing council meets tomorrow for the first time under new president Mario Draghi. While the median estimate of 55 economists surveyed by Bloomberg is for policy makers to leave the benchmark rate at 1.5 percent, four predict a 25 basis-point cut, with two forecast a 50 basis-point reduction.
Federal Reserve policy makers today raised their assessment of the world’s largest economy, while saying “significant downside risks” remain. They refrained from taking any additional steps to ease monetary policy.
Portugal sold 1.2 billion euros of 105-day bills at a yield of 4.997 percent, up from 4.972 percent at an Oct. 19 sale. The bid-to-cover ratio stayed at two, the nation’s debt agency said.
German bonds have returned 8.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt handed investors a 5.7 percent loss. Greece securities slumped 43 percent.
To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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