Greek Bonds Lead Declines as Election Threatens Euro Membership

Greek bonds led declines among the government debt securities of Europe’s high-deficit economies after voters flocked to parties opposed to the nation’s financial bailout, threatening its euro membership.

German five-, 10- and 30-year bonds were little changed after gains earlier that pushed yields to record lows. Socialist Francois Hollande ousted Nicolas Sarkozy as French president after yesterday’s elections and pledged to push for less austerity. Greece’s ability to form a government that can implement measures needed to guarantee its future in the currency bloc was questioned after the two main parties failed to secure a majority after elections yesterday.

“The risks related to Greece exiting the euro or defaulting outright have increased again, which is probably an even stronger boost for bunds,” said Michael Leister, a rates strategist at DZ Bank AG in Frankfurt. “The outcome in Greece looks messy. It looks like the recent moves will continue so that bund yields remain biased to the downside.”

Greece’s 2 percent bond maturing in February 2023 jumped 273 basis points, or 2.73 percentage points to 23.30 percent at 4:21 p.m. London time, leaving the price at 20.44 percent of face value. Spain’s 10-year yield increased one basis point to 5.75 percent. The yield on similar-maturity Italian bonds was four basis points lower at 5.40 percent, after jumping as much as 14 basis points to 5.57 percent.

Bunds Gain

Greek government bonds have lost investors 6.1 percent this year while Spain’s securities slipped 0.7 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds have returned 1.8 in 2012 as investors sought safety, the gauges show.

Bunds reversed gains as factory orders in Europe’s largest economy rose more than economists forecast in March, signaling demand from outside the euro area has helped German companies weather the debt crisis.

The 10-year bund yield was two basis points higher at 1.60 percent, after falling by three basis points to 1.552 percent. The 1.75 percent bond due July 2022 traded at 101.35. The 30-year yield was little changed at 2.30 percent after dropping to 2.272 percent. Two-year yields rose two basis points to 0.10 percent.

‘Austerity Not Inevitable’

France’s 10-year yield decreased three basis points to 2.80 percent after rising as much as six basis points. The two-year yield was four basis points lower at 0.55 percent.

“Austerity is not inevitable,” Hollande told supporters in Tulle, France, last night after he won with about 52 percent of the votes against about 48 percent for Sarkozy.

Hollande, France’s first Socialist leader in 17 years, inherits an economy that is barely growing, with jobless claims at their highest in 12 years and a rising debt load.

In Greece, New Democracy and Socialist Pasok were a seat short of a majority that would allow them to govern together, an Interior Ministry projection showed. Syriza, a coalition of left-leaning parties that has vowed to cancel the bailout terms, got 16.1 percent.

Voters across Europe are punishing governments for failing to control a debt crisis triggered by Greece in October 2009, leading to international bailouts for that country, together with Ireland and Portugal. It also spread to larger economies including Italy and Spain, whose governments also fell last year. Dutch Prime Minister Mark Rutte faces elections in September after his coalition collapsed last month.

‘Hard Part Starts’

“The elections may be over, but now the hard part starts,” Ciaran O’Hagan, head of euro-area rate strategy at Societe Generale SA in Paris, wrote in a client note today. “Forming new governments in Europe will still take weeks, in which time sovereign debt will be in limbo and at risk.”

Finland’s 10-year yields were two basis points higher at 1.96 percent after falling to a euro-era low of 1.922 percent. The Dutch 10-year yield was little changed at 2.16 percent, after falling by as much as three basis points to 2.12 percent.

Volatility in Greek debt securities was the highest in the euro area, followed by Ireland, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps compiled by Bloomberg. The yield on Irish bonds due October 2020 increased six basis points to 6.88 percent.

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