Greek Slump Deepens Amid Presidential Debate

Greek government bonds extended a selloff that’s pushed three-year note yields above 10-year rates on concern a presidential election will bring down the government and raise the anti-austerity Syriza party to power.

Greek stocks also declined and borrowing costs increased at an auction of shorter-maturity debt today. The bond-market losses spread to corporate issuers, dragged down securities from the euro area’s most-indebted nations, and boosted demand for the safest fixed-income assets in the region.

“We have this potentially explosive situation happening at a time when markets are moving toward year-end and there’s less volume,” which is exaggerating price moves, said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “There is some contagion going on if you look at the cheapening of Italy and Spain.”

Prime Minister Antonis Samaras, who nominated former European commissioner Stavros Dimas as his candidate for president, would have to dissolve parliament unless he’s able to muster the support of 180 lawmakers. Failure to do that would bring forward elections, which polls show would be won by Syriza leader Alexis Tsipras, who wants to roll back the budget cuts Samaras pushed through.

Greece’s three-year rate rose 112 basis points, or 1.12 percentage point, to 9.42 percent at 4:31 p.m. London time, after jumping 182 basis points yesterday. The 3.375 percent securities due in July 2017 fell 2.28, or 22.80 euros per 1,000-euro ($1,242) face amount, to 86.595.

The 10-year yield increased 44 basis points to 8.62 percent and touched 8.90 percent, the highest since Oct. 17. Investors demanding higher rates to lend for the shorter periods signals increased concern they may not be repaid in full.

Liquidity Risk

The decline in government bonds highlights the risk of holding securities from Europe’s most-indebted nations when adverse news sours demand. With a dearth of buyers, lower trading volumes may make it more difficult and costly to exit the positions.

Holding the debt can also be lucrative: Greek bonds returned almost 9 percent this year, according to data compiled by Bloomberg. Portugal’s, the best performers in the region, earned more than 21 percent.

The volatility “is surrounding the announcement of the presidential candidate election in December,” Sandra Crowl, a member of the investment committee at Paris-based Carmignac Gestion SA, said in e-mailed comments yesterday. “In a thin market, the short-term selloff has been exaggerated.” Carmignac holds more than 500 million euros of the nation’s debt.

Contagion Spread

Italy’s 10-year yield rose two basis points to 2.05 percent and Spain’s increased four basis points to 1.86 percent.

The rate on German 10-year bunds touched a record-low 0.672 percent. Thirty-year rates dropped to as little as 1.515 percent, also the lowest on record. The nation sold two-year debt at an average yield of minus 0.04 percent, meaning investors who hold them to maturity will get back less than what they paid.

Greek corporate bonds slumped for a second day, with junk-rated securities issued by Public Power Corp., Greece’s biggest electricity provider, and gaming developer Intralot SA falling to all-time lows. The bonds of refrigeration company Frigoglass SAIC and glass manufacturer Yioula Glassworks SA are also trading at the lowest levels on record.

ETF Prescience

Greece, which sparked the euro region’s debt crisis in 2009, returned to the spotlight earlier this year when the government proposed ending the program and budget-reform conditions attached to the 240 billion-euro bailout it received. Samaras is grappling to hold onto power as he’s challenged by Syriza, also known as Coalition of the Radical Left, which wants a writedown on Greek debt held by euro-area member states and the European Central Bank.

The nation officially requested a bailout extension for two months today, Simone Boitelle, a spokeswoman for Eurogroup chairman Jeroen Dijsselbloem, said via text message. Choosing Dimas as candidate for President “can help to remove uncertainties surrounding financial markets,” Annika Breidthardt, a European Union spokeswoman for regional policy, told reporters in Brussels.

A U.S. exchange-traded fund tracking the nation’s equities has had a record streak of redemptions, losing money for four straight months as investors began giving up on Greek stocks even before yesterday’s 13 percent rout. That proved prescient as the benchmark ASE Index plunged the most since 1987. It fell 2.9 percent today.

Bond Liquidity

While Greece returned to bond markets in April, liquidity hasn’t recovered to its pre-crisis levels.

Trading of Greek government debt through the electronic secondary securities market, or HDAT, was 44 million euros yesterday, ANA reported. Monthly trading volumes were as high as 136 billion euros in September 2004, Bank of Greece data show. They plunged to zero in October 2011.

The difference between the bid and offer yields for Greek 10-year securities, a measure of the bonds’ liquidity, was about 27 basis points, according to data compiled by Bloomberg. In contrast, the spread on benchmark German bunds was 0.2 basis point.

Greece sold 1.625 billion euros of 26-week securities at an average yield of 2.15 percent, up from 2 percent at an offering in September, and the highest since June. At 1.8 percent, the average yield on 13-week bills sold today was also the highest since June.

Carmignac holds about 205 million euros in three-year Greek debt, about 10 percent of the outstanding amount, according to data compiled by Bloomberg. The company also holds about 322 million euros of bonds maturing in five years, about 8 percent of the outstanding total, the data showed.

Greek bonds represent 1.9 percent of the total fixed-income investments at Carmignac and holdings are in a range of maturities, Crowl said. Carmignac manages 49 billion euros, of which about 28 billion euros is in fixed income, according to the company’s website.

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