Germany’s 10-year bund gained, erasing an earlier decline, as speculation that banks in the euro region may incur deeper losses spurred demand for the euro- region’s safest assets.
The gains pared the 10-year bund’s third straight weekly drop. Two-year securities also gained as yields near a seven week high boosted demand for the securities. John Gormley, leader of Ireland’s Green Party, said today the country’s bond spreads would widen if Ireland considered renegotiating with Anglo Irish Bank Corp. bondholders. The yield spread between 10-year German bunds and Irish bonds widened to the most on record.
“When you get spread widening pressures, Ireland tends to widen more than the rest because it’s seen as the weakest link,” said Padhraic Garvey, head of developed-markets debt strategy at ING Groep NV in Amsterdam. “Some people are starting to speculate that the International Monetary Fund may have to come in to help. There’s concern about the banking sector, about further budget cuts that may hurt the economy. These things add up.”
The yield on the bund, Europe’s benchmark security, fell 5 basis points to 2.43 percent as of 4:22 p.m. in London. It reached 2.51 percent earlier today, the highest since Aug. 10. The 2.25 percent security maturing in September 2020 rose 0.43, or 4.3 euros per 1,000-euro ($1,305) face amount, to 98.43. The two-year note yield fell 3 basis points to 0.78 percent.
Concern that Ireland would struggle to narrow its budget deficits as it supports its beleaguered banks helped send the extra yield investors demand to hold Irish 10-year debt instead of bunds 31 basis points higher to 387 basis points, the most since the introduction of the euro in 1999.
Standard & Poor’s last month cut the country’s credit rating to AA-, the lowest since 1995. S&P cited the rising costs to bail out institutions such as Anglo Irish, which was nationalized after the nation’s property boom went bust.
“You could be cutting off your nose to spite your face,” Gormley said in an interview with Dublin’s RTE Radio today referring to negotiating with the company’s bond holders. “You have to act very cautiously because you could find then that the spreads increase.” The Greens are the junior party in Ireland’s ruling coalition.
Ireland plans to sell as much as 1.5 billion euros of 2014 and 2018 maturities on Sept. 21 as part of its regular funding program, the Dublin-based National Treasury Management Agency said today.
Irish Finance Minister Brian Lenihan said the government is not having difficulty raising funding and that the increase in bond yields this week is “normal” before a debt auction.
Asked about a Barclays Capital report yesterday that Ireland may need external aid at some point if conditions worsen, Lenihan told reporters that “what it said was that the government was taking the right steps at the right time.”
The report “also pointed out that the government has no difficulty in funding itself, but it did correctly in my view signal that we must be extremely careful in how we proceed,” Lenihan said, according to e-mailed comments from his office today.
European Central Bank Governing Council member Axel Weber said he’s confident that Greece will achieve its targets for the consolidation of their budget.
Greece has achieved “sizeable success already” and is running a fiscal program “to get their house in order,” Weber said in a speech in Oestrich-Winkel, Germany, today.
The Greek-German 10-year yield spread widened 5 basis points to 912 basis points, after narrowing earlier today.
Greece will sell 300 million euros of 13-week Treasury bills on Sept. 21, the Public Debt Management Agency said in an e-mailed statement today.
German bonds have returned 7.9 percent this year, compared with a 7.6 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt has lost 19 percent, while Irish bonds have dropped 3.2 percent, the indexes show.