European Bonds Advance as Merkel Says Greek Debt Relief Possible

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Italian and Spanish government bonds led an advance among European sovereign securities as optimism on Greece’s bailout and falling commodity prices boosted demand for the euro area’s peripheral debt.

In her first public comments since the region’s finance ministers backed an 86 billion-euro ($95 billion) aid package, German Chancellor Angela Merkel said her country would consider debt relief for Greece to ensure the International Monetary Fund joins in the third round of bailouts. Greek bonds rose as investor concern eased that the nation can make its debt payments. Peripheral bonds outperformed securities from Europe’s core as an index of commodities fell to the lowest level in more than 13 years.

“Merkel said she wants to have the IMF on board,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “So they have to accept that there needs to be some debt relief for Greece and it will definitely be, in a way, an easing of loan conditions.” This was supporting European bonds, he said.

Italy’s 10-year bond yield fell six basis points, or 0.06 percentage point, to 1.76 percent as of 4:50 p.m. London time. The 1.5 percent security due in June 2025 rose 0.495, or 4.95 euros per 1,000-euro face amount, to 97.755. Similar-maturity Spanish bond yields dropped eight basis points to 1.94 percent.

Greek 10-year bond yields fell 46 basis points to 9.09 percent and earlier dropped below 9 percent for the first time since February.

Greek Deal

European governments agreed on a third aid deal for Greece last week, allaying concern over its ability to repay its debt.

“Peripheries are performing better on the Greek news we got on Friday of a deal being in place,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “That is impacting Spanish, Italian and Portuguese bonds today.”

A fall in commodity prices led by a slide in crude oil also weighed on yields, by depressing the outlook for inflation, which erodes the value of fixed-income payments from bonds.

“A further drop in crude oil is having an effect on inflationary pressures in the U.S. and in Europe. This is a driver for the drop in EMU yields as well,” DZ Bank’s Lenz said.

OPEC may boost crude oil production to a record 33 million barrels a day, the most ever, after international sanctions are removed against Iran, according to the country’s representative at the Organization of Petroleum Exporting Countries.

That helped push futures down as much as 2 percent, with West Texas Intermediate touching $41.64 a barrel on the New York Mercantile Exchange. The erased losses later Monday and traded at $42.58, up 0.2 percent. The Bloomberg Commodity Index fell 0.3 percent and touched its lowest level since early 2002.

The yield on German 10-year bunds, Europe’s benchmark sovereign securities, slid three basis points to 0.63 percent.

“As commodity prices remain under pressure that will keep bonds supported and we will see yields lower,” Cantor Fitzgerald’s Callan said. “This will keep this idea of deflation in the western world still very front and center.”

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