Greek bonds tumbled, leading declines by securities from Europe’s most indebted countries, as a German government adviser said the Mediterranean nation will probably have to restructure its debt burden.
The slide drove yields on Greece’s two- and 10-year bonds to euro-era records. Portuguese and Irish bonds also fell after Lars Feld, a member of German Chancellor Angela Merkel’s council of economic advisers, said Greek restructuring is probable. Spanish bonds rose after demand increased at an auction of 10-year debt. German bunds fell for a second day as equities rose, sapping demand for the safest assets.
“Talk of Greek restructuring dominates sentiment and is pushing peripherals lower,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “The bond market continues to push spreads wider, suggesting the reality of the restructuring risk.”
Greek two-year yields climbed 129 basis points to 22.02 percent at 4:26 p.m. in London. It reached 22.06 percent, the highest since at least 1998, when Bloomberg began collecting the data. The 4.6 percent security due 2013 fell 1.56, or 15.6 euros per 1,000-euro ($1,450) face amount, to 73.335. The Greek 10-year yield rose 27 basis points to 14.75 percent, after reaching a euro-era record of 14.80 percent. The extra yield, or spread, over German debt rose to a record 11.45 percentage points.
“I fear that Greece can’t get out of this situation without some kind of restructuring,” Feld told Deutschlandfunk radio today. While “that doesn’t have to mean an actual default,” it could include “the buyback of bonds through a European institution,” he said, without elaborating.
The cost of insuring Greek sovereign debt jumped 30 basis points to a record 1,271 basis points, according to CMA prices for credit-default swaps. The cost signals a 66 percent chance of default within five years.
Portugal’s two-year yield rose to a euro-era record of 10.58 percent, while the nation’s 10-year yield rose 19 basis points to 9.28 percent after reaching a record 9.29 percent.
The nation’s borrowing costs increased at an auction of 320 million euros of six-month bills. The securities due in November were issued at an average yield of 5.529 percent, compared with 5.117 percent the last time the securities were sold on April 6. Investors bid for 3.66 times the amount of securities on offer, compared with a ratio of 2.3 previously.
The debt agency also sold 680 million euros of three-month bills due in July at an average yield of 4.046 percent, attracting bids for twice the amount offered.
“Compared to the previous auctions these have not been much worse in terms of the yield paid by the Treasury,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. They were “solid auctions, at the top end of the range in size,” he said.
LCH Clearnet Ltd., Europe’s biggest clearing house, said it will increase the extra deposit charge for customers holding “long” positions in Portuguese government bonds to 25 percent from 15 percent, according to a statement today on its website. The change takes effect tomorrow, LCH said.
Spain sold 3.4 billion euros of 2021 and 2024 bonds, with the bid-to-cover ratio for the 10-year debt increasing to 2.1 times the amount sold from 1.81 last month. The Spanish 10-year yield fell four basis points to 5.47 percent.
“Bunds are lower as the Spanish auction went relatively well,” Lloyd’s Diebel said. This may have “lowered contagion fears to an extent.”
The 10-year German bund yield was two basis points higher at 3.30 percent. It reached 3.225 percent yesterday, the lowest since March 24. Yields on two-year notes were three basis points higher, at 1.83 percent.
The Stoxx Europe 600 index rose 1.5 percent, while the MSCI World Index jumped 1.9 percent.
The spread between Spain’s 10-year bonds and similar-maturity German bunds narrowed to 217 basis points after reaching 232 basis points yesterday, the most since March 3. The Portuguese-German spread widened to 599 basis points, the most since Bloomberg began collecting the data in 1998.
Ireland’s two-year note yields rose 62 basis points to 10.30 percent, the highest since March 24. Ten-year yields gained 30 basis points to 10.10 percent, the first time they have yielded less than the two-year note since March 23, according to closing-price data compiled by Bloomberg.
European Central Bank policy makers are balancing the need for higher borrowing costs in countries like Germany, where the economy is booming, against soaring bond yields in the region’s heavily indebted nations. Some ECB governing council members have signaled they will back more increases in borrowing costs after the central bank lifted its benchmark rate by 25 basis points to 1.25 percent on April 7.
Euribor futures fell for a second day, pushing the implied yield on the contract expiring in December up two basis points to 2.10 percent as traders added to bets that the ECB will boost borrowing costs.
German government bonds have handed investors a loss of 1.9 percent this year through yesterday, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned 0.6 percent. Spain’s debt has gained 1.3 percent and Portugal’s has lost 12.4 percent, the indexes show.