Greek Borrowing Costs at Most Since 2012 Amid Political Turmoil

Greece’s government bonds fell, pushing three- and five-year rates to the highest since the nation restructured its debt in 2012, amid speculation early presidential elections will spark renewed political turmoil.

The nation’s 10-year yield exceeded 9 percent after Prime Minister Antonis Samaras said the markets fear a victory for anti-bailout party Syriza in potential elections next year. Germany’s 30-year bunds rose, with yields dropping below 1.5 percent for the first time, as the European Central Bank’s second round of targeted loans aimed at boosting the economy fell short of analyst estimates, underlining the case for further stimulus.

“Greece is suffering again,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “There’s a lot of political uncertainty and I don’t thing it will disappear soon.”

Greece’s three-year yield jumped 119 basis points, or 1.19 percentage point, to 10.61 percent as of 4:27 p.m. London time. The 3.375 percent note due in July 2017 fell 2.295, or 22.95 euros per 1,000-euro ($1,239) face amount, to 84.30. The securities were sold in July via banks at a price of 99.65 percent of face value.

The nation’s five-year rate surged as much as 103 basis points to 9.68 percent, the highest level since March 2012. The 10-year yield increased to 9.17 percent, the most since Jan. 17.

Invesco Ltd. said it may look to buy Greek bonds once the country’s political situation stabilizes. Invesco, which had assets of about $790 billion as of Oct. 31, closed its position in Greek debt in September, London-based money manager Mark Nash said in an interview today.

Greek Exit

Samaras said Syriza, which leads in opinion polls, brings back talk of a Greek exit from the euro area. The Prime Minister “doesn’t hesitate to beg markets to attack the country,” Syriza said in an e-mailed statement today.

Failure to rally enough support for Samaras’s presidential nominee, Stavros Dimas, by a third and final ballot on Dec. 29 would force the prime minister to dissolve parliament. Opinion polls suggest the resulting election would be won by the anti-austerity Syriza party.

Greece’s three-year yield climbed to more than 136 percent in March 2012, according to data compiled by Bloomberg, before the nation underwent the biggest debt reorganization in history.

Trading of Greek government bonds through the electronic secondary securities market, or HDAT, was 15 million euros yesterday, ANA reported. Monthly trading volumes plunged to zero in October 2011 from a peak of 136 billion euros in September 2004, Bank of Greece data show.

Greek Liquidity

The difference between the bid and offer yields for Greek 10-year securities, a measure of the bonds’ liquidity, was about 28 basis points, according to data compiled by Bloomberg. In contrast, the spread on benchmark German bunds was 0.1 basis point.

The cost of insuring Greek government bonds against default climbed today. Credit-default swaps that insure $10 million of Greek debt for five years were quoted at an upfront fee of $2.9 million and payments of $500,000 per year, according to CMA. That’s up from an advance fee of $2.7 million yesterday and signals a 52 percent probability of default within five years.

As he attempts to expand the ECB’s balance sheet, President Mario Draghi said last week officials would act should current stimulus be seen as insufficient, and were considering other measures, including purchases of sovereign debt known as quantitative easing.

Loan Repayment

The 130 billion-euro value of today’s allocation of targeted loans won’t cover the repayments lenders owe from a previous loan program. The amount euro area banks will borrow is less than the 148 billion-euro median estimate in a survey of 24 analysts. Predictions ranged from 90 billion euros to as much as 250 billion euros.

Between now and February, banks must repay 270 billion euros of outstanding loans issued at the end of 2011 to alleviate the effects of the euro area’s sovereign debt crisis. The initial round of targeted loans in September raised 82.6 billion euros.

“If there’s no major surprise to the upside this will be taken as another argument that QE needs to be implemented, so core and periphery bonds could benefit,” Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt, said before the announcement. “The money will be used for repayment, so the net effect on the ECB’s balance sheet will be limited.”

German Yields

Germany’s 30-year yield dropped one basis point to 1.52 percent, after touching 1.484 percent, the lowest level since Bloomberg began compiling the data in 1994. The nation’s 10-year yield was little changed at 0.68 percent after falling to 0.656 percent, also the least on record.

With inflation languishing below the ECB’s goal of just under 2 percent and the market’s price-growth expectations crumbling as crude oil declines, the central bank has already started purchases of covered bonds and asset-backed securities, and introduced a negative deposit rate.

Draghi said last week that stimulus measures are intended to increase the ECB’s balance sheet by as much as 1 trillion euros. “We’re thinking specifically about government bonds,” Governing Council member Ewald Nowotny said this week.

The five-year, five-year forward inflation swap rate, highlighted by Draghi in August at a symposium for central bankers, fell two basis points to 1.74 percent today. It closed at a record-low 1.7225 percent on Oct. 15. The annualized euro-area inflation rate was at 0.3 percent last month, matching the lowest since October 2009.

Spanish and Italian bonds were little changed. Rates on Italy’s 10-year securities were at 2.06 percent, after earlier falling as much as six basis points. They reached a record-low 1.942 percent on Dec. 8. Similar-maturity Spanish debt yielded 1.87 percent.

Greek government securities returned 5 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s earned 15 percent, Italy’s 14 percent and Germany’s 9.3 percent.

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