Greece, Ireland, Portugal Yields Hit Records on Default Concern

Yields on government securities from Greece, Ireland and Portugal reached records amid speculation the heavily indebted nations won’t be able to avoid restructuring.

Ireland’s two-year yield reached a euro-era record 12.08 percent after the European Union said the nation’s debt burden surged the most in the currency area last year. Greek two-year yields have climbed almost 870 basis points this month, reaching 24.45 percent today as investors priced in losses, or so-called haircuts, they may incur in the event of a restructuring. Lars Feld, a member of German Chancellor Angela Merkel’s council of economic advisers, said Greece cannot avoid restructuring its debts.

“There’s more speculation about debt restructuring, which is reflected in the Greek curve,” said Christopher Rieger, head of fixed-income strategy at Frankfurt-based Commerzbank AG. “I don’t see where any support for Greek debt will be coming from. The prices are still quite a long way away from any reasonable haircut that people will expect if restructuring was announced.”

Greece’s two-year yields rose to a euro-era record of 24.45 percent and were at 24.24 percent as of 5:07 p.m. in London. The 4.6 percent security due 2013 fell 1.39, or 13.9 euros per 1,000-euro ($1,462) face amount, to 70.79. Ten-year yields reached a record 15.38 percent, up from 12.84 percent on March 31.

Portugal’s two-year note yields touched a euro-era record of 11.74 percent, up from 8.78 percent at the end of last month. The 10-year yield reached a record 9.61 percent today, compared with 8.41 percent on March 31.

Greek-German Spread

“I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future,” Feld told Bloomberg Television in Frankfurt. “I think that Greece should restructure sooner than later.”

The yield difference, or spread, between Greek 10-year bonds and German securities of a similar maturity widened to 1,212 basis points, the most since Bloomberg began collecting the data in 1998. The spread has widened 264 basis points this month, even as the Greek government said it has no plans to renegotiate terms with creditors.

The spread between Portuguese and German 10-year bonds widened to as much as 636 basis points, the most since before the introduction of the euro.

The cost of insuring debt sold by Greece and Portugal rose to records, according to traders of credit-default swaps. Contracts on Greece jumped 13 basis points from April 21 to 1,345 basis points, signaling a 66 percent chance of default within five years, according to CMA. Portuguese swaps climbed six basis points to 666.

Budget Gap

Earlier this month, Portugal became the third euro-region country to seek an international bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the currency bloc a year ago and then engulfed Ireland.

Greece’s 2010 budget gap was more than a percentage point wider than the government estimated after a revision by Europe’s statistics agency, a report today showed. Last year’s shortfall was 10.5 percent of gross domestic product, compared with 15.4 percent of GDP in 2009, Eurostat said in a statement. In February, the Greek government said it met its revised target for a 9.4 percent deficit in 2010.

Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP, the data showed.

Margin Increase

“The overshooting of the budget deficit forecasts has added to concern about whether they will achieve fiscal consolidation over the medium term, and consequently investors are demanding a higher risk premium to hold those government bonds,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital in Edinburgh. “Further widening of yield spreads can’t be ruled out in the near term.”

The yield on Irish two-year government notes climbed 73 basis points to a euro-era record of 12.08 percent after the debt data release. Ten-year yields climbed to a record 10.65 percent, pushing the spread versus German bunds wider to a record 740 basis points.

LCH Clearnet Ltd., Europe’s biggest clearing house, said it will increase the extra deposit charge for customers holding “long” positions in Portuguese and Irish government bonds.

LCH will raise the Portuguese margin to 35 percent from 25 percent, the company said today in a statement on its website. The Irish margin will be boosted to 45 percent from 35 percent, LCH said. The increased margin requirement takes effect from tomorrow, LCH said.

Avert Inflation

European Central Bank President Jean-Claude Trichet said today policy makers must avert any jump in inflation expectations amid the risk of higher prices spreading through the euro-region economy.

“We have risks of second-round effects here and there,” Trichet said in the transcript of an interview with Finnish publications Helsingin Sanomat and Kauppalehti. Second-round effects refer to an increase in consumer prices that prompt bigger wage increases, which then feed through to faster inflation.

ECB policy makers increased their benchmark interest rate by 25 basis points to 1.25 percent at their April 7 meeting. The central bank is balancing the need for higher borrowing costs in countries like Germany against soaring bond yields in the region’s heavily indebted nations. The next policy meeting is scheduled for May 5.

Spanish Auction

Spain sold 1.16 billion euros of three-month Treasury bills at an average yield of 1.37 percent, compared with 0.899 percent at a previous sale of similar-maturity debt on March 22. Investors bid for 4.43 times the amount of securities on offer, up from a so-called bid-to-cover ratio of 4.33. Spain sold 806 million euros of six-month bills at an average yield of 1.867 percent.

Italy sold 8.5 billion euros of 185-day bills at an average yield of 1.66 percent, up from 1.40 percent at a previous auction of similar-maturity securities on March 28. Investors bid for 1.43 times the amount of bills on sale, compared with 1.61 times previously.

German two-year note yields were within two basis points of the lowest in a month, as turmoil in Greece boosted demand for the perceived safety of the euro-region’s most-traded government securities.

The two-year yield was three basis points lower at 1.73 percent. The yield touched 1.716 percent on April 19, the lowest since March 25. The 10-year bund yield dropped two basis points to 3.24 percent.

Germany plans to sell six billion euros of 3.25 percent bunds maturing in 2021 tomorrow, while Italy is scheduled to auction inflation-protected securities due 2016 and 2021.

German government bonds have handed investors a loss of 1.8 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while U.S. Treasuries have returned 0.6 percent. Italian debt has earned 1.1 percent, while Spanish securities have generated 1.5 percent, the indexes show. Greek debt has lost 9.3 percent.