Greek, Irish and Portuguese two-year notes led declines bysecurities from Europe's most indebted nations, while German bundsrose before the publication of stress tests that may show Europeanbanks need more capital.

Yields on notes of the three nations to accept internationalbailouts reached euro-era records, while German 10-year yieldsheaded for a second straight week of declines as investors favoredthe safest assets amid concern the region's debt crisis isworsening. Regulators will release test results for 91 banks tohelp reassure investors that the region's lenders have enoughcapital. Standard & Poor's yesterday became the second ratingscompany this week to warn that it may cut the U.S.'s top creditgrade.

“Uncertainty continues to be very high, and that explains whybunds are stronger,” said Michael Markovic, a senior fixed- incomestrategist at Credit Suisse Group AG in Zurich. “If we see negativenews and surprises from big banks, that would be something thataffects the market, and it may lead to a further rally in bunds dueto safe-haven flows.”

The yield on Greece's two-year notes surged 118 basis points to32.39 percent as of 12:58 p.m. in London, and earlier reached 34percent. Ten-year Greek yields rose 36 basis points at 17.44percent.

Bank Assessment
The assessment of Europeanbanks is the first by the European Banking Authority since it wasestablished earlier this year. The tests follow criticism ofsimilar evaluations by the EBA's predecessor last year that foundbanks needed only 3.5 billion euros ($5 billion) in extra capital.S&P's own stress test, published in March, found European bankswould need as much as 250 billion euros in fresh capital if facedwith a “sharp” increase in yields and a “severe” economicdownturn.

Ireland's two-year note yield was 84 basis points higher at22.16 percent, a euro-era high. Spanish 10-year bond yields rosesix basis points to 5.92 percent while equivalent-maturity Italiandebt yielded 5.67 percent, four basis points more thanyesterday.

The 10-year bund yield declined two basis points to 2.72percent. It reached 2.50 percent on July 12, an eight-month low,amid speculation the debt crisis was spreading to Italy. The 3.25percent German security due July 2021 rose 0.20, or 2 euros per1,000-euro face amount, to 104.595. Yields on two-year notes werelittle changed at 1.23 percent.

U.S. Rating
German government bonds havehanded investors 1.9 percent this year, while U.S. Treasuriesreturned 3.5 percent, according to indexes compiled by Bloombergand the European Federation of Financial Analysts Societies. Greekbonds lost 20 percent, and Italian bonds 2.5 percent, the indexesshow.

European stocks fell, extending their biggest weekly drop sinceMarch. Portugal's two-year note yield jumped 77 basis points to18.43 percent after touching 18.71 percent, while the nation's10-year bond yield increased 13 basis points to 12.76 percent.

S&P said there's at least a 50 percent chance it will cutthe U.S.'s AAA rating by one or two notches into the AA categorywithin 90 days. S&P said the ranking would be at risk if itconcludes Congress and President Barack Obama's administrationhaven't achieved a credible solution to the rising government debtburden and aren't likely to achieve one in the near future.

Bloomberg News

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