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German Bunds Fall as Court Backs Euro Rescue; Italian Bonds Rise

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Sept. 7 (Bloomberg) -- German bunds dropped the most in a week as stocks rose and the nation’s top court backed the government’s participation in euro-area bailouts, reducing demand for the region’s safest assets.

Italian and Spanish bonds rallied, with Italy’s 10-year yields falling the most since the European Central Bank began buying the nation’s debt on Aug. 8. Greek 10-year bond yields climbed above 20 percent for the first time as finance chiefs from three of the region’s AAA rated countries failed to break a deadlock over Finland’s demands for collateral in return for aiding the nation.

“This could have been a hurdle for approval of the European Financial Stability Facility,” said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. The German court decision “offers short-term support to peripherals,” he said, referring to bonds from the euro region’s most indebted nations.

German 10-year bund yields climbed six basis points to 1.91 percent at 4:17 p.m. in London, the biggest increase since Aug. 31. They fell to a record 1.824 percent yesterday. The 2.25 percent securities due September 2021 dropped 0.590, or 5.90 euros per 1,000-euro ($1,404) face amount, to 103.045. Two-year yields advanced six basis points to 0.49 percent. They slipped to an all-time low 0.417 percent yesterday.

The Stoxx Europe 600 Index added 2.6 percent and the Standard & Poor’s 500 Index rose 1.9 percent.

Suits Rejected

The Federal Constitutional Court in Karlsruhe threw out suits targeting Germany’s share of the 110 billion euros in loans for Greece from euro-region governments and the International Monetary Fund, as well as a separate 750 billion-euro rescue fund approved last year to halt the spread of the Greek debt crisis.

The court said the ruling shouldn’t be seen as “blanket” approval for future rescue participation, and the government must seek approval from the parliament’s budget committee for new guarantees it assumes under the EFSF.

Spain’s 10-year bond yields fell 18 basis points to 5 percent, and two-year rates dropped 24 basis points to 3.42 percent. Italy’s 10-year bond yields declined 26 basis points to 5.24 percent, while two-year yields dropped 33 basis points to 3.87 percent.

The ECB began purchasing Spanish and Italian bonds on Aug. 8 to curtail a surge in yields as contagion from the debt crisis that engulfed Greece, Ireland and Portugal infected the euro region’s third- and fourth-largest economies.

Italian Budget

Italy may need a new budget-adjustment plan next month because a 54 billion-euro ($76 billion) austerity package to be voted on today won’t convince the ECB to keep buying the nation’s bonds, the chairman of the Senate Finance Committee said today.

“How long can the ECB continue to buy Italian Treasury bonds?” Mario Baldassarri said in an interview in Rome. “We may need another adjustment in three, four weeks which will be the real answer to the European Commission and to markets.”

Greek 10-year yields increased as much as 30 basis points to a record 20.11 percent before settling 27 basis points higher at 20.09 percent. Two-year yields jumped as much as 300 basis points to 55.31 percent. The spread between 10-year Greek and German bonds widened to a record 1,818 basis points, or 18.18 percentage points.

Trading Slumps

Trading in Greek government bonds on the electronic secondary securities market slid 66 percent in August from July, when it slid 64 percent, data from the Bank of Greece showed.

Volume on the so-called HDAT fell to 45 million euros from 131 million euros the previous month, and 819 million euros a year earlier, the central bank said on its website. The amount of trading declined 99.9 percent from 30.76 billion euros in August 2009, the data showed.

Europe’s leaders are scrambling to forge a deal that balances Finnish demands for Greece to put up collateral without derailing the second rescue aimed at stopping the debt crisis from spreading to global markets.

Finnish Prime Minister Jyrki Katainen said his country may not contribute to a second Greek bailout package if demands for collateral in exchange for new loans aren’t met. Such an outcome “remains a possibility,” Katainen told reporters after delivering a speech in Helsinki today.

Stimulus Spending

The European Union said a joint mission of officials from the European Commission, ECB and International Monetary Fund, known as the troika, may return to Greece in mid-September. No date has been set, EC spokesman Amadeu Altafaj said.

“The market is fearful that there might be some larger disagreement between the Greek government” and the troika, “which might prevent the next tranche of aid being paid out,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The market is seeing the German constitutional court ruling as opening the way for Germany to continue on its path of rescuing the euro, so there’s some relief.”

The cost of insuring Greek government debt rose 117 basis points to a record 2,771 basis points, according to CMA prices for credit-default swaps.

Portugal today sold 854 million euros of 105-day bills at an average yield of 4.959 percent. Investors bid for 2.2 times the amount on offer. That compares with a bid-to-cover ratio of 2.6 at a previous auction of the bills on Aug. 3, which were sold at 4.967 percent.

Portugal’s two-year note snapped a three-day decline, pushing the yield down five basis points to 14.34 percent after rising as much as 15 basis points to 14.54 percent. The 10-year yield added as much as 17 basis points to 11.03 percent, the highest since Aug. 30.

German 10-year yields have declined more than 1 percentage point in the past three months as a slump in shares around the world and concern Europe’s debt crisis will intensify, increased demand for the nation’s debt.

Bunds have returned 7.4 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Treasuries gained 8.4 percent, Italian debt lost 2.7 percent, Spanish bonds returned 4.3 percent and Greek bonds lost 28 percent, the indexes show.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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