Flight From Government Debt Accelerates as Greece Fuels Meltdown

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The exodus from sovereign-debt markets is accelerating as investors question the sustainability of central-bank-engineered rallies that had pushed yields to record lows.

Greece’s government bonds tumbled on concern the country’s talks with creditors will fail to clinch a funding deal in time to prevent a default. The decline dragged Spanish and Italian counterparts lower. While previous instances of turmoil in Greece boosted the refuge appeal of German bunds, their prices fell as well. That weighed down U.S. government debt, which has been supported for much of this year by higher relative yields after the European Central Bank introduced quantitative easing.

“We’re giving back some of the excess enthusiasm,” said Jay Mueller, a portfolio manager with a team that oversees $15 billion in Wells Capital Management’s Menomonee Falls, Wisconsin office. “If the European economy actually responds to the ECB, we’ve almost certainly seen the lows in yields.”

Tuesday’s slump comes on the heels of declines triggered last week by comments from billionaire investor Jeffrey Gundlach of DoubleLine Capital LP, who said he’s considering making an amplified bet against bunds. His comments echoed Janus Capital’s Bill Gross, who once managed the world’s largest bond fund. Gross had said bunds were the “short of a lifetime.”

The yield on Greek two-year notes rose 149 basis points, or 1.49 percentage points, to 20 percent as of 3 p.m. New York time. The 3.375 percent security due in July 2017 dropped 1.940, or 19.40 euros per 1,000-euro ($1,115) face amount, to 72.385. The 10-year bond yield rose 63 basis points to 10.77 percent.

Eurodollar Futures

Yields soared by almost 30 basis points in Italy and Spain. At the same time, yields on 10-year German bunds gained six basis points to 0.51 percent, the highest level since January.

“If the Greece situation continues like this, it’s reasonable to expect bunds to turn around,” said Krishna Memani, New York-based chief investment officer of Oppenheimer Funds Inc. Until recently, “people were heavily positioned in bunds, expecting them to rally. You are seeing a bit of an unwinding of that positioning,” and “that impacted Treasuries.”

Treasuries fell as selling in futures markets accelerated after a report showed the services economy unexpectedly grew at a faster pace last month while investors weigh conflicting measures of the economy. Yields on benchmark 10-year notes rose three basis points to 2.17 percent, after reaching the highest level since March.

‘Fragile Market’

Sales of Eurodollar futures contracts that expire in June 2016 totaled 109,000 during the 9:30 to 9:35 a.m. New York time period. The volume compared with an average amount of total trades for the contract by this time of the day during the past five sessions of 12,843, according to Bloomberg data.

“It’s part of what triggered this whole thing,” said Arthur Bass, managing director in New York at Coex Partners, a brokerage firm. “It was one of the catalysts in today’s activity -- for what’s been a fragile market giving up more ground.”

As negotiations aimed at easing Greece’s liquidity crisis continue, Portugal’s Finance Minister Maria Luis Albuquerque encouraged Greek Prime Minister Alexis Tsipras to take the offer on the table. Adding to the tension, the Financial Times reported that the International Monetary Fund warned it may cut off support to Greece.

“There had been some hope we’d get more positive comments out over the weekend, but again a disappointing lack of progress,” said Owen Callan, a fixed-income analyst at Cantor Fitzgerald LP in Dublin.

Trading in Greek government bonds remains scant, with no turnover through the Bank of Greece’s electronic secondary securities market, or HDAT, on Monday, according to Athens News Agency, or ANA.

Central-bank data showed trading volume across all maturities through HDAT totaled 2 million euros in April, the least since February 2012. Volumes plunged to zero in October 2011 after peaking at 136 billion euros in September 2004.

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