Euro Area’s Lower-Rated Bonds Slide as Tension Over Greece Rises

Italian and Portuguese securities led declines among lower-rated euro-area government bonds amid rising political tension over Greece and concern countries may boost debt sales to take advantage of this year’s European Central Bank-fueled rally.

In a reversal of market moves when the ECB started its quantitative-easing program last week, German bonds, perceived to be the safest in the region, outperformed those from the periphery. Greece’s 10-year yield jumped above 11 percent.

“There could be some risk-off sentiment we see today, and if you look at stocks they are also down,” said Felix Herrmann, an analyst at DZ Bank AG in Frankfurt. “We are far from being out of the woods when it comes to Greece.”

Italy’s 30-year yields increased 10 basis points, or 0.10 percentage point, to 2.13 percent at 5 p.m. London time, and reached 2.20 percent, the highest since March 10. The rate fell to a record-low 1.784 percent on March 12.

The price of the 4.75 percent bond due in September 2044 fell 3.09, or 30.90 euros per 1,000-euro ($1,066) face amount, to 157.55.

Unable to access bailout funds and locked out of international capital markets, Greece will seek a deal at a European Union summit starting Thursday to unlock a payment from its 240 billion-euro rescue package, European officials with direct knowledge of the situation said on Tuesday. The country is facing more than 2 billion euros in debt payments Friday.

Most Unhelpful

International Monetary Fund officials told their euro-area colleagues that Greece is the most unhelpful country the organization has dealt with in its 70-year history, according to two people familiar with the talks, who asked not to be identified because the call was private.

The yield on Greek three-year notes increased 171 basis points to 22.14 percent, the highest since the notes due in July 2017 were issued. The 10-year rate climbed 46 basis points to 11.27 percent.

Markets also declined after Italy’s 8 billion-euro sale of bonds due in 2032 on Tuesday, which was larger than some analysts had forecast. The nation’s 10-year rate rose four basis point to 1.31 percent.

Italy’s bond sale was “larger than the market appeared to be expecting,” Chris Attfield, a fixed-income strategist at HSBC Holdings Plc in London, wrote in a note to clients on Wednesday. Slovenia’s sale of a 20-year bond fits with the view that there could be “opportunistic longer-dated issuance from periphery countries in the current environment,” he wrote.

Opportunistic Sales

Rates on Spanish 10-year securities rose two basis points to 1.27 percent. Portugal’s 30-year yield climbed 14 basis points to 2.38 percent, adding to yesterday’s increase that was preceded by nine days of declines.

Price gains have pushed yields from Austria to Spain to record lows since the ECB started buying securities with a target of 60 billion euros a month, amid concern that there may not be enough securities in circulation for the central bank to meet its goal. That may also encourage governments to sell more debt in an attempt to lock in the low borrowing costs. The risk is that investors will balk at the low returns.

“Yields have fallen so sharply and to such an extent that there might be some opportunistic behavior in the part of governments” boosting issuance and that “may have some impact on this market,” said Elwin de Groot, a senior market economist at Rabobank in Utrecht, Netherlands. “The liquidity in the bond market has only decreased, so the market is much more susceptible to flows so every time there a hike in supply, or demand, that creates a bit of volatility.”

Germany’s 10-year bund yield fell nine basis points to 0.20 percent, the first drop since March 11. Thirty-year rates were seven basis points lower at 0.65 percent.

The bonds extended gains as Sweden’s central bank delivered an unscheduled interest-rate cut and expanded its government-bond purchase plan as it struggles to revive inflation. Sweden isn’t part of the euro area.

Germany is graded AAA with all three main credit ratings companies. Italy, Spain and Portugal have a rank that’s below A with the firms.

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