Portugal led declines in the bonds of the euro-region’s most indebted nations as European Union leaders prepared to start a two-day meeting to seek ways to avoid the euro area’s first sovereign default.
Losses pushed the yields on the Italian two-year note to the highest in a month, while Irish and Portuguese 10-year securities yielded the most relative to German bunds since the euro’s introduction. Risk signals in the region are flashing red, European Central Bank President Jean-Claude Trichet said late yesterday. German note yields fell to the least since February as a report showed the region’s services and manufacturing industries grew at a slower pace than predicted.
“There’s still a lot of concern about the periphery, especially Greece,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “Key decisions have to be made in the next 10 days or so and the market is relatively nervous about that.”
Portuguese two-year note yields rose 71 basis points to a euro-era record of 14.40 percent at 4:42 p.m. in London. The yield on the equivalent-maturity Spanish security gained 17 basis points to 3.60 percent.
European leaders will reaffirm a time-line for assistance to Greece hammered out by euro-area finance ministers, German Chancellor Angela Merkel told reporters in Brussels today. The EU is awaiting a Greek parliamentary vote on austerity measures before taking operative decisions, she said.
The two-year Greek yield, which climbed above 30 percent for the first time last week, was 76 basis points higher at 28.64 percent. The 10-year yield was seven basis points higher at 16.88 percent. It has jumped more than 4 percentage points since the start of this year.
The euro slumped as much as 1.6 percent to $1.4127, the biggest drop since June 15. Bonds from across the euro region fell relative to bunds, with the French-German spread widening three basis points to 45 basis points and the Dutch-German spread reaching 35 basis points from 32.
The cost of insuring against default on European sovereign debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped nine basis points to 233, approaching the record 236 basis points set on June 16. An increase signals deteriorating perceptions of credit quality.
Swaps on Greece were little changed at 1,984 basis points, signaling about an 82 percent chance of default within five years, according to CMA. Ireland increased 20 basis points to 775, Portugal climbed 25 to 807 and Spain rose 13 to 297.
German securities, perceived to be the region’s safest, returned 0.4 percent this year, while Treasuries gained 3.3 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek government bonds have lost investors 18 percent this year amid speculation that the country is moving closer to defaulting on its debt commitments.
“On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”
The spread between 10-year Italian bonds and German bunds widened 14 basis points to 208, the most since Jan. 11.
Moody’s Investors Service placed Italy’s Aa2 local and foreign-currency government bonds under review for a possible downgrade on June 17, partly citing “long-term structural impediments to growth.” Portugal’s 10-year spread over bunds climbed 39 basis points to a euro-era record 859 basis points. Irish 10-year securities yielded 900 basis points more than bunds, the most since the euro’s 1999 debut.
A composite index of services and manufacturing industries based on a survey of euro-area purchasing managers fell to 53.6 from 55.8 in May, London-based Markit Economics said today. Economists had forecast a drop to 55.2, the median of 16 estimates in a Bloomberg News survey showed. A reading above 50 indicates growth.
Bunds have gained as investors sought a haven amid mounting concern that officials will fail to contain the euro area’s sovereign-debt crisis, making it more likely that the ECB will pause rate increases as the recovery in the stronger economies stalls. At a Brussels meeting today and tomorrow, EU leaders will discuss the size of new loans to the Greek government and how to get holders of their bonds to shoulder some of the cost.
The 10-year German bund yield fell eight basis points to 2.86 percent, the lowest since Jan. 11. The 3.25 percent security due July 2021 gained 0.695, or 6.95 euros per 1,000-euro face amount, to 103.315. Two-year note yields dropped 11 basis points to 1.37 percent, after reaching 1.35 percent, the least since Feb. 22.
The German bund futures contract expiring in September rose to 127 for the first time since Dec. 1.