Greece Sparks Meltdown in Euro-Area Bonds as Italy, Spain Tumble

Bloomberg

by Anchalee WorrachateEshe Nelson

12:00 PM EEST

May 5, 2015

A slump in euro-area government bonds gathered force on concern Greece’s talks with creditors will fail to clinch a deal in time to prevent a default.

As Greek bonds tumbled, the repercussions spread across the region, with Spain’s 10-year yield rising the most since June 2013 to the highest this year. German bunds, the region’s benchmark sovereign securities, were swept up in the selloff with Treasuries after an unexpected jump in growth for U.S. service industries.

Greece’s debt standoff is exacerbating tension in euro-area bond markets, which already succumbed to their worst month since 2013 in April. The nation blamed international creditors for a failure to find an agreement in its bailout talks, saying a deal won’t be possible until they agree on a common set of demands. Portugal’s Finance Minister Maria Luis Albuquerque said on Tuesday Greek Prime Minister Alexis Tsipras should take the offer on the table.

“There had been some hope we’d get more positive comments out over the weekend, but again a disappointing lack of progress,” said Owen Callan, a fixed-income analyst at Cantor Fitzgerald LP in Dublin. “This is a general paring back of risk positions.”

Spain’s 10-year yield jumped 29 basis points, or 0.29 percentage point, to 1.80 percent at 4:16 p.m. London time. It reached 1.81 percent, the highest since Dec. 17. The 1.6 percent security due in April 2025 fell 2.675, or 26.75 euros per 1,000-euro ($1,119) face amount, to 98.205.

Debt Crisis

The prolonged fiscal impasse is threatening Greece’s fragile recovery and reviving memories of the region’s debt crisis earlier this decade that threatened to rip apart the currency bloc and resulted a restructuring of Greek debt that was the biggest in history.

In forecasts published on Tuesday, the European Commission predicted the Greek economy would grow 0.5 percent this year, down from the 2.5 percent estimated in February. Adding to the tension, the Financial Times reported that the International Monetary Fund warned it may cut off support to Greece.

“Greek economic conditions are deteriorating,” said Frederik Ducrozet, an economist at Credit Agricole SA’s corporate and investment banking unit in Paris. “It’s negative in terms of the fiscal revenues and the backdrop for the negotiations. But it also provides Greece with some bargaining power when they negotiate the primary surplus for this year and next.”

Yields on Italian 10-year debt climbed as much as 30 basis points to 1.84 percent, a level last seen on Jan. 12. The 30-year yield surged 35 basis points to 2.90 percent. Trading volume in the first Italian bond future contract rose to the highest since March 18.

Trader Discomfort

Germany’s 10-year yield increased for a sixth-straight day, adding six basis points to 0.52 percent. Borrowing costs are climbing even as the European Central Bank sticks with purchases of 60 billion euros of the region’s debt a month to revive the economy. The quantitative-easing plan sent the yield to a record-low 0.049 percent as recently as April 17.

“It is quite strange that German bund yields are rising so much despite the risk-off sentiment on the back of Greece’s development,” said Gianluca Ziglio, a fixed-income strategist at Sunrise Brokers LLP in London. “It seems people are not comfortable with current levels of bund yields anymore given the potential change in the inflation outlook.”

The yield on Greek two-year notes rose 151 basis points to 21 percent, and the 10-year bond yield added 56 basis points to 11.11 percent.

Trading in Greek government bonds remains scant, with no turnover through the Bank of Greece’s electronic secondary securities market, or HDAT, on Monday, according to Athens News Agency.

Central-bank data showed trading volume across all maturities through HDAT totaled 2 million euros in April, the least since February 2012. Volumes plunged to zero in October 2011 after peaking at 136 billion euros in September 2004.