Germany’s Bonds Climb as Greek Notes Tumble on Debt Altercation

Germany’s government bonds climbed, driving yields down to records, as the nation’s Finance Ministry poured cold water on Greece’s push for agreement on a debt writedown.

Greek three-year securities fell for a fifth day after German Finance Ministry spokesman Martin Jaeger told reporters in Berlin Friday that a “discussion about a haircut or a debt conference is outside of reality.” Greece’s four-day old government will not co-operate with its troika of official creditors, Finance Minister Yanis Varoufakis said after meeting with Jeroen Dijsselbloem, chair of the euro region’s group of finance ministers, in Athens.

“Investors are clearly nervous about the outlook for Greece given the lack of progress between the Greek government and the troika,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Both sides are talking tough, suggesting an early resolution is unlikely. Hence investors will continue to demand a risk premium on Greek bonds particularly at the short-end amid fears of a potential default.”

Germany’s 30-year yield fell nine basis points, or 0.09 percentage point, to 0.95 percent as of 4:47 p.m. London time and reached 0.943 percent, the lowest level since Bloomberg began compiling the data in 1994. The 2.5 percent bund due in August 2046 rose 3.12, or 31.20 euros per 1,000-euro ($1,129) face amount, to 142.17. The nation’s 10-year rate slid as much as six basis points to a record-low 0.298 percent, while two-and three-year yields also touched all-time lows.

Yields Climb

The rate on Greece’s three-year notes jumped 173 basis points to 19.01 percent, and touched 19.26 percent, the highest level since the nation restructured its debt in 2012. Greek 10-year yields increased 84 basis points to 11.01 percent, while the five-year rate climbed above 15 percent.

The three-year note’s yield premium of about 8 percentage points above the 10-year bonds may reflect investors’ concern they won’t get paid back in full.

Greece will seek a new arrangement within the euro-area framework, Varoufakis told reporters in Athens. It’s willing to run a small primary surplus indefinitely and maintain balanced budgets, he said.

Taking unilateral steps is not the way forward, according to Dijsselbloem.

Germany “has issued a warning to the new Greek government that it’s out of line with the rest of the European Union,” RIA’s Stamenkovic said. “It is a game of chicken and no one is giving an inch at the moment.”

Illiquid Market

Trading of Greek government bonds across all maturities through the electronic secondary securities market, or HDAT, was 19 million euros on Thursday, 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.

The difference between the bid and offer yields for Greek 10-year government debt, a measure of the bonds’ liquidity, was about 35 basis points on Friday, according to data compiled by Bloomberg. In contrast, the spread on similar-maturity German bunds, the euro region’s benchmark securities, was 0.2 basis point.

“I don’t think it’s liquid enough to see an ebb and flow of investor demand,” said Richard McGuire, head of European rates strategy at Rabobank International in London, referring to Greece’s bond market. “It must be a pretty hardy group with strong stomachs. I don’t think investors are dipping in and out of the market.”

Inflation Slows

German bonds also rose after data showed the annual inflation rate in the euro area fell to minus 0.6 percent this month, matching the biggest decline in prices in the history of the single currency. The drop exceeded economists’ estimates for a 0.5 percent decrease. Falling prices help boost the purchasing power of the fixed payments on bonds.

Last week, European Central Bank President Mario Draghi pledged to tackle slowing price growth by pumping 1.1 trillion euros into the region’s economies through purchases of public and private debt.

“Greece will certainly lead to flight-to-quality considerations,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “The other thing is the other big buyer in the market, the ECB, stepping up to the plate in March. In coming weeks we will probably see lower lows” in German yields.

Greek securities delivered the worst returns among sovereign debt tracked by Bloomberg’s World Bond Indexes this year through Thursday. They lost 2.3 percent, set for a fifth consecutive monthly decline, while Germany’s returned 1.8 percent and Spain’s earned 1.5 percent.

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