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Greek Notes Snap Gain on Moody’s Warning; Spanish Bonds Rebound

Greek two-year notes snapped three days of gains after the nation’s risk of default was raised to 50 percent by Moody’s Investors Service, damping optimism about prospects for an international aid package.

The German bund yield reached the lowest since January amid concern the global economic recovery is faltering. The U.S. reports initial jobless claims today, following data yesterday that showed U.S. employers hired fewer workers than forecast. The Stoxx Europe 600 equity index fell 0.9 percent. Spanish debt rebounded as the nation auctioned 4 billion euros ($5.8 billion) of three- and four-year notes, meeting the maximum target.

“The market’s focus is on when we will get the new bailout package and what conditions will feature, and that’s continuing to be the name of the game,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “An important driver for bunds has been the bad U.S. data, which lent support to bunds, so today’s initial U.S. jobless claims will be important.”

Greek two-year note yields rose six basis points to 24.60 percent at 10:22 a.m. in London. The yield yesterday fell to 24.53 percent, the least since May 17. The 4.6 percent security due May 2013 slipped 0.015, or 15 euro cents per 1,000-euro face amount, to 71.66. The nation’s 10-year bond yield gained 13 basis points to 16.28 percent.

Moody’s downgraded Greece to Caa1 from B1, the same level as Cuba, late yesterday. The move came as policy makers narrowed in on bond rollovers as a pillar of any new aid package. Investors may be given preferred status, higher coupon payments or collateral as incentives, said two other EU officials familiar with the situation.

Growth Concerns

The debt-stricken nation, which faces a funding gap of 30 billion euros of bonds next year, has seen its 10-year yield surge over 340 basis points higher since the start of April.

The 10-year bund yield was unchanged at 2.99 percent after earlier sliding to 2.96 percent, the lowest level since Jan. 12. The yield on German two-year notes rose two basis points to 1.63 percent. It slumped to 1.56 percent on May 30, the least in 10 weeks.

U.S. employment increased by 38,000 last month, the smallest increase since September, from a revised 177,000 in April, according to figures from ADP Employer Services yesterday. The median estimate in the Bloomberg News survey anticipated a 175,000 advance for May.

Initial jobless claims in the world’s largest economy fell to 417,000 from 424,000 the prior week, according to the median estimate of 50 economists surveyed by Bloomberg News before today’s report.

Spanish Auction

The yield on the 10-year Spanish bond fell three basis points to 5.29 percent after reaching as high as 5.35 percent before the debt auction. The two-year yield slipped two basis points to 3.46 percent after earlier reaching 3.52 percent.

Investors bid for 2.49 times the amount of 2014 securities on offer, up from a so-called bid-to-cover ratio of 1.79 at an auction in April, and 2.90 times the amount of securities due 2015, from 1.63 at a sale in September. The average yield on the three-year note was 4.037 percent, while the four-year security attracted an average yield of 4.23 percent.

“It seems to have gone reasonably well,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Ltd. in Edinburgh. “Investors are clearly demanding a higher risk premium on Spanish government bonds than they have done previously, but the fact that they are able to raise the upper end of their targeted level is reassuring.’

Irish, Portuguese Debt

Spain faced “a subnormal secondary market liquidity environment, and that’s somewhat of a challenge,” Schnautz said before the auction. He said the nation’s target of between 3 billion and 4 billion euros was “not too aggressive compared to their recent ranges.”

Irish debt fell, pushing the 10-year yield up three basis points to 11 percent. The yield on similar-maturity Portuguese debt dropped seven basis points to 9.67 percent.

German government bonds have handed investors 0.2 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned 3.2 percent. Greek bonds have lost 12.5 percent so far this year and Portuguese debt 14.5 percent, the data show.

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