Greek Bonds Fall After Moody’s Downgrade; Spanish Bonds Rebound

Greek 10-year government bonds fell for a second day after Moody’s Investors Service said there is a 50 percent chance that the nation will default.

German 10-year yields reached the lowest since January as policy makers haggled over a second bailout for Greece in just over a year. Bunds pared their advance after European Central Bank President Jean-Claude Trichet said governments should consider setting up a finance ministry for the 17-nation currency region. Spanish debt rose after the nation auctioned 4 billion euros ($5.8 billion) of three- and four-year notes, meeting the maximum target.

“The market’s focus is on when we will get the new bailout package and what conditions will feature, and that’s continuing to be the name of the game,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London.

Greek 10-year yields rose 10 basis points to 16.25 percent as of 4:55 p.m. in London. The 6.25 percent security due June 2020 slipped 0.28 or 2.80 euros per 1,000-euro ($1,443) face amount, to 54.23.

Moody’s downgraded Greece to Caa1 from B1, the same level as Cuba, late yesterday. The move came as policy makers narrowed in on bond rollovers as a pillar of any new aid package. Investors may be given preferred status, higher coupon payments or collateral as incentives, according to two EU officials familiar with the situation.

The debt-stricken nation, which faces a funding gap of 30 billion euros next year, has seen its 10-year yield surge more than 340 basis points since the start of April.

Spanish Auction

The 10-year bund yield was little changed at 2.99 percent, after earlier sliding to 2.96 percent, the lowest level since Jan. 12. The German two-year note yield advanced three basis points to 1.64 percent.

Spain’s bonds advanced as it sold 4 billion euros of three-year and four-year securities, meeting the maximum target the Treasury had set for the sale.

Investors bid for 2.49 times the amount of 2014 securities on offer, up from a so-called bid-to-cover ratio of 1.79 at an auction in April, and 2.90 times the amount of securities due 2015, from 1.63 at a sale in September. The average yield on the three-year note was 4.037 percent, while the four-year security attracted an average yield of 4.23 percent.

Irish, Portuguese Debt

“It seems to have gone reasonably well, with the authorities managing to get the upper end of their targeted level away,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Ltd. in Edinburgh. “Investors are clearly demanding a higher risk premium on Spanish government bonds than they have done previously, but the fact that they are able to raise the upper end of their targeted level is reassuring.”

Spain’s 10-year yield slid three basis points to 5.29 percent, while the two-year yield declined five basis points to 3.43 percent. Portuguese debt also rose, with the 10-year yield slipping eight basis points to 9.65 percent, while the yield on similar-maturity Irish debt gained three basis points to 11.01 percent.

German government bonds have handed investors 0.2 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned 3.2 percent and Spanish bonds 2.7 percent. Greek bonds have lost 12.5 percent so far this year and Portuguese debt 14.5 percent, the data show.

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