Portugal, Spain Notes Fall as Trichet Fails to Buoy Sentiment

Spanish, Italian Notes Fall Fourth Day Before ECB Decision
European Central Bank (ECB) headquarters in Frankfurt, Germany. Benchmark German bunds were weaker before the announcement from the European Central Bank that economists in a Bloomberg survey unanimously said will signal an increase in the refinancing rate to 1.50 percent from 1.25 percent. Photographer: Hannelore Foerster/Bloomberg

Government notes from Europe’s most indebted nations declined as the European Central Bank’s move to loosen collateral rules on downgraded Portuguese bonds failed to stem concern that the sovereign-debt crisis is spreading.

German bunds and U.S. Treasuries slid while stocks advanced as data on U.S. jobs bolstered optimism about the world economy, weakening demand for the safest fixed-income assets. The ECB raised interest rates for the second time this year as President Jean-Claude Trichet said policy in the euro region remains “accommodative.” Irish bonds pared a drop after Fitch Ratings analyst Chris Pryce said the nation is unlikely to default.

“There is a negative spiral for Portugal, and there are definite concerns about contagion to other bigger peripherals,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “On balance, Trichet was on the hawkish side. We have seen a minor rise in bund yields.”

The yield on two-year Portuguese notes was up 50 basis points to 17.25 percent as of 4:10 p.m. in London after reaching a record 18.28 percent. The 5.45 percent securities due in September 2013 fell 0.71, or 7.10 euros per 1,000-euro ($1,437) face amount, to 79.73.

Spanish two-year note yields rose four basis points to 3.66 percent, Italian yields on securities of similar maturity increased five basis points to 3.32 percent, and Greek two-year note yields were up 38 basis points to 28.83 percent.

ECB Collateral

European officials remain at loggerheads over the best way to handle the crisis, which took another lurch forward this week when Portugal’s debt was cut below investment grade by Moody’s Investors Service two days ago. Discussions over how to include private investors in a second bailout for Greece are ongoing, with the uncertainty helping to drive up borrowing costs at other nations’ debt sales.

Trichet said in Frankfurt today that policy makers suspended “the minimum credit-rating threshold” for Portuguese debt used in repurchase operations, similar to measures already taken for Greece and Ireland to support local banks. He also maintained his view that the central bank is unwilling to sanction a default by a euro-area nation.

Dutch Finance Minister Jan Kees de Jager said private investors may have to be forced into contributing to the new Greek aid package, according to an interview in Dutch newspaper Het Financieele Dagblad.

Irish Outlook

Irish two-year note yields were 31 basis points higher at 15.61 percent after earlier reaching a record 16.04 percent.

“Our ratings, which are investment grade, reflect the view that we certainly don’t believe that Ireland is likely to default,” Fitch’s Pryce said in a telephone interview today.

Developments in Greece haven’t been “sufficient” to change Fitch’s views on Ireland at this stage, Pryce said. Fitch has a BBB+ rating on Ireland.

Spanish borrowing costs increased as the nation auctioned 3 billion euros of debt today. Spain sold 1.5 billion euros of five-year notes at an average yield of 4.871 percent, up from 4.549 percent in a May auction. It also sold 1.5 billion euros of three-year notes for an average yield of 4.291 percent, compared with 4.037 percent in a June 2 tender. France also sold 8.4 billion euros of debt.

German two-year yields were little changed at 1.58 percent. Ten-year yields increased four basis points to 2.97 percent.

Companies in the U.S. added 157,000 workers to their payrolls in June, according to figures from ADP Employer Services, bolstering confidence in the labor market before tomorrow’s government employment report. German industrial production rose 1.2 percent in May, after declining a revised 0.8 percent in April, exceeding the 0.8 percent median estimate of 32 economists surveyed by Bloomberg.

German bonds returned 0.6 percent this year, compared with 2.7 percent for U.S. Treasuries and 2.6 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.