Bloomberg
By Garth Theunissen and Emma Charlton - Jul 20, 2011 7:01 PM GMT+0300
German bunds fell while securities from the euro region’s most fiscally strained nations rose on optimism that European leaders meeting tomorrow will take steps to contain the region’s debt crisis.
The declines raised yields on 10-year German bonds by the most in more than four months as stocks gained from Tokyo to London amid optimism that U.S. lawmakers are nearing an agreement to cut the deficit. European officials are considering new measures to prevent contagion, a person close to the talks said, as French President Nicolas Sarkozy and German Chancellor Angela Merkel prepare to meet before a regional crisis summit.
“There’s optimism that some sort of solution will be found tomorrow at the summit and that the U.S. is close to agreement on its debt ceiling, and that improves demand for risk,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh, a broker for banks. “Having said that, the market is in a very nervous mood. Whatever we get tomorrow, it’s unlikely to be a comprehensive program for the euro.”
Ten-year bund yields increased nine basis points to 2.77 percent as of 4:32 p.m. in London, after reaching 2.78 percent for the biggest intraday gain since March 3. The 3.25 percent security maturing in July 2021 lost 0.81, or 8.1 euros per 1,000-euro ($1,423) face amount, to 104.13. Yields on two-year notes climbed seven basis points to 1.31 percent.
European Summit
The Stoxx Europe 600 Index climbed 1.3 percent, while the MSCI Asia Pacific Index added 1.2 percent.
European leaders are meeting in Brussels tomorrow to discuss measures to restore confidence in the euro region’s creditworthiness. Greek Prime Minister George Papandreou said they need to show they can resolve the debt crisis to avoid contagion spreading to Italy and Spain in what could be “a make-or-break moment” for the 17-member bloc.
Officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, according to a person familiar with the talks. Other options up for discussion include enabling the main 440-billion-euro rescue fund to lend to recapitalize banks, said the person.
European Central Bank Executive Board member Juergen Stark urged the region’s governments to stick to an agreement last month to avoid a so-called selective default for Greece, according to Germany’s Boersen-Zeitung newspaper. He also said the Frankfurt-based central bank won’t change its rules or take on any more risk if the private sector is involved in a Greek bailout. The ECB confirmed the remarks.
‘Disaster’
ECB Executive Board member Lorenzo Bini Smaghi said yesterday that governments should bury their plans to involve the private sector in a solution for Greece’s debt problems, Die Welt reported, citing an interview.
“A restructuring would be a disaster,” Bini Smaghi was quoted as saying. “A restructuring would be by far more costly for the taxpayer than granting Greece another aid package with conditions,” he said, according to the report.
Germany today sold 1.64 billion euros of 2042 bonds at an average yield of 3.43 percent. Yields on benchmark 30-year German bonds trading in the secondary market rose nine basis points to 3.47 percent. Portugal issued 450 million euros of 91- day bills and 300 million euros of 182-day bills.
Spanish 10-year yields fell 12 basis points to 5.97 percent, while equivalent-maturity Italian yields were 13 basis points lower at 5.60 percent. Irish 10-year bonds rose for a second day, reducing yields by 61 basis points to 13.06 percent. Two-year Irish yields dropped 45 basis points to 21.85 percent, the least in three trading sessions.
Greek Contagion
Greek two-year yields surged as much as 144 basis points to a record 40.46 percent, before retreating to 38.07 percent, 95 basis points below the previous close.
Royal Bank of Scotland Plc offered to buy two-year Greek notes at a yield of 47.05 percent and sell at 31.52 percent today, a so-called bid-ask spread of 15.53 percent, according to data compiled by Bloomberg. That compares with a spread of less than two basis points on German two-year notes.
Greek government bond trading on the electronic secondary securities market known as HDAT dropped 47 percent in June after a 50 percent decline the previous month, according to data from the Bank of Greece. Traded volume fell to 368 million euros from 695 million euros in the previous month, and 1.57 billion euros in the same period a year earlier.
Greece risks contaminating the rest of the euro region even if officials avert a default, theInternational Monetary Fund said in a report late yesterday. Germany’s Merkel told reporters that the debt crisis can’t be fixed “in one step.”
No Bund Bargains
“There will be some kind of deal, but the fear is that it won’t be sufficient to stop the contagion to larger peripheral member states,” said Elwin de Groot, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “The market is positioned not to expect too much from the meeting, especially after Merkel tried to subdue expectations yesterday.”
Spanish Finance Minister Elena Salgado said her country wants the EU to increase “flexibility” for its crisis tools, including the ability to buy bonds on the secondary market, according to comments made to Parliament in Madrid today.
German government bonds handed investors 2.3 percent this year, compared with 3.8 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds have lost 23 percent, while Portugal’s have shed 29 percent, the indexes show.
“German bond yields have reached levels that they are no longer a good bargain,” said Charles Berry, a bond trader at Landesbank Baden-Wuettermberg in Stuttgart.
To contact the reporters on this story: Garth Theunissen in London atgtheunissen@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net
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