Greek two-year notes surged, driving yields lower for the first time in nine days, after Chancellor Angela Merkel retreated from German demands that bondholders be forced to bear a “substantial” share of a new rescue.

Ten-year Greek yields also slid. Merkel will work with the European Central Bank to resolve the crisis, she told reporters in Berlin today at a joint press conference with French President Nicolas Sarkozy. Irish two-year yields, which earlier climbed above 13 percent for the first time, fell, while German securities dropped as stocks rebounded.

“The market is taking it positively that there is a Franco-German agreement, even though there are still elements that need to be resolved,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “It’s understandable that markets have reacted with some relief, but we’re not going to price out risk on a wholesale basis. It puts some downside to core markets, such as bunds, and allows for some spread tightening from very wide levels.”

The yield on the Greek two-year note tumbled 138 basis points to 28.31 percent as of 12:53 p.m. in London, paring a weekly increase that pushed it above 30 percent yesterday for the first time since the euro’s 1999 introduction. The Portuguese two-year yield was little changed at 13.06 percent, after rising to a euro-era record. Ireland’s two-year yield decreased 16 basis points to 12.79 percent.


Bond Losses
The euro recovered its losses against the dollar, strengthening 0.7 percent to $1.4299, paring a second weekly decline that was fueled by concern divisions within Europe were hardening over how to resolve the crisis. The yield on the 10- year U.S. Treasury note rose four basis points to 2.97 percent.

Greek government bonds lost investors 8.7 percent this month, extending this year’s drop to 20 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Portuguese debt handed investors a 19 percent loss this year. German bonds, perceived to be the region’s safest securities, returned 0.7 percent.

“We need to get something done as soon as possible,” said Orlando Green, a fixed-income strategist at Credit Agricole SA in London. “We need to see more unity. Markets are still concerned about the outcome of the Greek situation.”

The extra yield, or spread, that investors demand to hold Greek 10-year debt instead of similar-maturity German bunds surged to a record 1,543 basis points, or 15.43 percentage points, before falling to 1,419 basis points. Portugal’s 10-year bonds yielded 811 basis points more than their German counterparts.


Bunds Drop
Merkel said that a debt rollover modeled on the so-called Vienna Initiative was a “good basis” for enrolling investors voluntarily to help Greece. She declined to give a date for the package to be worked out, saying that the matter must be resolved “as quickly as possible.”

“We would like to have a participation of private creditors on a voluntary basis,” Merkel told reporters today. This “should be worked out jointly with the ECB and there shouldn’t be any dispute with the ECB on this,” she said.

The German bund yield jumped five basis points to 2.97 percent, leaving it one basis point higher since the end of last week. The yield dropped to 2.91 percent yesterday, the lowest since Jan. 11. The 3.25 percent security due July 2021 fell 0.43, or 4.3 euros per 1,000-euro ($1,429) face amount, to 102.43. Yields on two-year notes increased seven basis points to 1.52 percent.


Bloomberg News


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