Greece’s Bonds Lead Euro-Periphery Debt Rout

Greek bonds led a rout in the euro area’s most indebted countries as opinion polls suggesting the nation’s governing coalition is losing support reawakened concern the regional debt crisis is far from resolved.

Greece’s 10-year yields surged to the highest in seven weeks while those on similar-maturity Italian bonds jumped by the most since June, having earlier dropped to a record. Irish and Spanish securities also reversed gains that had pushed yields to the least since Bloomberg began collecting the data. German bonds rallied as investors sought the safest assets. European Parliament elections will be held on May 25.

“Risks in Greece are still largely underestimated” so the selloff in bonds could continue, said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. If the outcome of the European Parliament elections “has an impact on the next steps for debt sustainability then it could also spill over to other markets in the periphery.”

Greek 10-year yields rose 51 basis points, or 0.51 percentage point, to 6.81 percent at the 5 p.m. London time close of trade after climbing to 6.85 percent, the highest since March 28. The 2 percent bond maturing in February 2024 dropped 3.095, or 30.95 euros per 1,000-euro ($1,371) face amount, to 75.3.

Support for Prime Minister Antonis Samaras’s coalition partner Pasok, which dominated Greek politics for three decades, plunged to sixth place with 5.5 percent of the vote in a recent poll before the elections as voters blame the party for the country’s economic meltdown.

Investment Concern

The prospect of Pasok lawmakers withdrawing backing for the coalition could deter the foreign investors helping to fuel the recovery, according to Megan Greene, chief economist at Maverick Intelligence and a columnist with Bloomberg View in London.

“If there were snap elections and investors were spooked by the prospect of Syriza being the negotiator for Greece, it could really hurt the Greek recovery because it’s so fragile,” Greene said in a telephone interview. Syriza is the opposition party that rejected the terms of the nation’s international bailout.

Germany’s 10-year yield fell six basis points to 1.31 percent after touching 1.30 percent, the least since May 17, 2013.

Safest Debt

German bonds are perceived to be among the safest government debt securities in the region. The yield fell to a record 1.13 percent in June 2012 as the debt crisis, originally sparked by Greece’s admission that it had understated its budget deficit, escalated and threatened to shatter Europe’s monetary union.

The prospect of renewed instability in Greece raises the possibility of a reversal of demand for the the region’s assets that began after European Central Bank President Mario Draghi pledged in July 2012 to safeguard the euro.

“Nothing is a problem until it’s a problem and then suddenly sentiment turns,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “It’s all extraordinarily fragile,” he said, referring to the rally in peripheral bonds.

Italy’s 10-year yield rose 19 basis points, the most since June 24, to 3.10 percent. It dropped to 2.885 percent earlier today, the lowest since Bloomberg began collecting the data in 1993. The volume of Italian bond futures trades rose to the highest on record, with trade on the Italian BTP bond futures reaching about 165,000 contracts.

Italian Economy

The Italian economy shrank 0.1 percent from the previous three months, a report showed today. Economists in a Bloomberg survey had forecast growth of 0.2 percent. Expansion in Germany quickened to 0.8 percent from 0.4 percent, beating economists’ forecast for a 0.7 percent increase. In France, gross domestic product was unchanged, while it contracted in Portugal and the Netherlands.

Euro-area growth was 0.2 percent, half the median estimate of economists surveyed by Bloomberg. Consumer prices in the region increased 0.7 percent in April from a year earlier, less than half the ECB’s goal of just under 2 percent.

Bonds in the region rose earlier amid speculation the reports would increase the chances of more ECB stimulus next month.

“This should be the final nail in the coffin for those who are doubting whether the ECB will do something,” said Jan von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki. “The market is getting quite sure that the ECB will deliver more easing. Maybe that will weaken the impact to some extent” and limit further declines in yields, he said

The rate on French 10-year bonds dropped five basis points to 1.76 percent after reaching the least since May 2, 2013. The yield on Spain’s 10-year debt rose 16 basis points to 3.02 percent, after reaching a record-low 2.83 percent.

Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Spain and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

(An earlier version of this story was corrected to show leadership details of the Pasok party.)

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