Greek, Spanish Yield Spreads Widen on Economic Growth Concern

Greek, Spanish yield spreads widen on growth concern
Spanish and Greek bonds fell. Photographer: Kostas Tsironis/Bloomberg

The extra yield investors demand to hold the bonds of so-called peripheral European nations instead of German bonds increased as signs the economic recovery may be slowing added to the appeal of the safest fixed-income assets.

The yield on the benchmark 10-year bund fell to its lowest in a week after a report today showed growth in Europe’s services and manufacturing industries slowed in June. It extended declines after U.S. data showed purchases of new homes slid to a record low. Spanish and Greek bonds fell, widening the yield spread over German notes. The cost of insuring against losses on Greek debt soared to the highest in more than a month.

“This risk-off theme is unfolding again with spreads coming out,” said Michael Leister, a fixed-income strategist at WestLB AG in Dusseldorf, Germany. “From the risk side bunds are well supported.”

The yield on the 10-year bund fell five basis points to 2.65 percent as of 4:30 p.m. in London, after earlier dropping to 2.64 percent, the lowest since June 16. The 3 percent security maturing July 2020 rose 0.4, or 4 euros per 1,000-euro ($1,224) face amount, to 103.05.

Bund yields fell as low as 2.50 percent this month amid concern Europe’s debt crisis may deepen. While demand at bond auctions for so-called periphery nations has renewed confidence in the countries’ ability to fund their budget deficits, indications the recovery is sputtering reignited demand for German debt.

Purchasing Managers

Markit Economics said today an index based on a survey of euro-area purchasing managers in services and manufacturing fell to 56, from 56.4 in May. Consumer confidence in Germany, Europe’s largest economy, will hold steady next month, according to GfK AG’s sentiment index.

New home sales in the U.S. collapsed a record 33 percent to an annual pace of 300,000 last month from April, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Data yesterday showed an unexpected drop in sales of previously owned homes.

Greek government bonds fell, pushing the yield to more than 10 percent for the first time since May 10, the day the European Central Bank began buying debt securities to support a European Union rescue plan for nations struggling to raise funds. The extra yield investors demand to hold Greek 10-year bonds instead of benchmark German bunds widened to 775 basis points from 711 basis points yesterday.

Credit-Default Swaps

The securities may also be falling as managers in so-called passive funds sell the bonds, anticipating their removal from bond indexes. Greek securities will leave indexes managed by Citigroup Inc. and Barclays Plc at the end of this month after they were downgraded to junk by Moody’s Investors Service.

Credit-default swaps tied to Greek sovereign debt surged as much as 91.5 basis points to 941, above the all-time high closing level of 940 on May 6, according to CMA DataVision.

European governments will consider imposing a charge on bond sales by countries that violate debt rules in the wake of the Greece-driven fiscal crisis, a draft document showed.

Countries that flout debt-reduction pledges could face “a levy in the form of a predefined percentage (number of basis points) on any issuance of government debt,” according to a European Commission proposal obtained by Bloomberg News.

The ECB has been buying mostly Greek government bonds as part of its rescue package designed to contain the sovereign-debt crisis, Philippe Mills, chief executive officer of Agence France Tresor, said at a conference in London yesterday.

ECB Buys Bonds

“The ECB is buying mainly Greek debt, a little bit of Portugal, a little bit of Ireland,” Mills said. “That’s it.”

The Spanish 10-year bond yield rose three basis points to 4.58 percent. Portuguese 10-year yields advanced four basis points to 5.8 percent.

Portugal auctioned 943 million euros of bonds due 2015, more than originally planned at an auction today. The securities were sold at an average yield of 4.657 percent, compared with 3.701 percent at an offering in May.

“This week the ECB has been very sparse in its purchases, if at all,” David Keeble, head of fixed-income strategy at Credit Agricole Corporate & Investment Bank, said today in an interview on Bloomberg Television. “The illiquidity in the secondary market is pushing people toward the auctions.”

Italy is selling bonds indexed to six-month Euribor via banks, which will mature on Dec. 15, 2015 and may have a spread of 82 to 85 basis points, according to bankers involved in the transaction. The country received 5.5 billion euros in orders for the debt, the banker said.

German Sales

German bonds also rose amid speculation the country may reduce the amount of securities it plans to sell. The Bild Zeitung newspaper said yesterday the nation will need to borrow 60 billion euros, less than the 80 billion euros originally projected.

“Recent fiscal data in Germany is pointing toward lower levels of net issuance,” Alan James, a fixed-income analyst at Barclays Plc in London, said in an investor note today.

The difference in yield between two-year and 10-year German securities narrowed five basis points to 206 basis points, the least since June 8, based on closing prices.

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