Greece’s government bonds slid, sending yields to a five-week high, on concern that a proposal to end financial aid from the International Monetary Fund early would allow the country to backslide on its budget controls.
Greek Prime Minister Antonis Samaras, whose country touched off Europe’s debt crisis five years ago, is seeking to exit its bailout, which came with reform conditions that caused a political backlash.
“It must be a worrisome perspective to have Greece back on its own and Mr. Samaras trying to convince us that Greek debt is sustainable at current yield levels,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The market would be calmer if it knew Greece were to remain under an adjustment program with external control over economic policy and fiscal discipline.”
Greece’s 10-year yield jumped 18 basis points, or 0.18 percentage point, to 6.06 percent at the 5 p.m. closing in London, after increasing 11 basis points yesterday. It’s the first time the rate has risen above 6 percent since Aug. 15. The 2 percent security maturing in February 2024 fell 1.10, or 11 euros per 1,000-euro ($1,286) face value, to 80.94.
While Greece’s bonds are still this year’s best-performing sovereign securities tracked by Bloomberg World Bond Indexes, the nation’s economy was ravaged as it cut spending to help bring its debt under control and meet terms of its financial bailout.
Greece won’t need another aid package, Samaras said after discussions with German Chancellor Angela Merkel today. The country needs breathing space for reforms, he said.
Adding to bond-investor concern, separate polls in the past week showed the anti-bailout Syriza opposition party in the lead, though elections aren’t due before 2016.
European bonds were boosted last week when the region’s banks asked for 83 billion euros in targeted European Central Bank (ECB) loans, below all analyst predictions in a Bloomberg survey. That fueled speculation the stimulus announced so far will have to be supplemented with a quantitative-easing program of bond purchases to prevent the euro-area falling into a deflationary spiral.
German 10-year bond yields fell below 1 percent today as euro-area manufacturing growth slowed more than economists predicted, boosting chances the ECB will expand monetary stimulus. The index of manufacturing dropped to 50.5 from 50.7 in August.
Euro-area manufacturing reports “add to the case that the ECB measures are not yet achieving the desired effect,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in Frankfurt. “The market seems to expect more and more ECB easing.”
The 10-year bund yield may increase to 1.10 percent by the end of December, before declining in 2015 to test its previous record low as the ECB undertakes asset purchases, Leister said. The rate fell to 0.866 percent in August, the least since Bloomberg began compiling the data in 1989. Today it was little changed at 1.01 percent. The price of the 1 percent bund maturing in August 2024 was 99.88.
The median of economists’ and analysts’ predictions compiled by Bloomberg is for the rate to end 2014 at 1.10 percent and increase in the first quarter of next year to 1.20 percent.
Europe’s largest economy will cut issuance by 4 billion euros in the fourth quarter versus previous plans, to 43 billion euros, Germany’s debt office said in an e-mailed statement today, citing a reduced funding need in the federal budget. The nation plans to start reducing the amount of bonds outstanding from as early as next year in line with a 2013 election promise to stop adding debt, the Finance Ministry said in a report to parliament last month.
Volatility on Italian bonds was the highest in the euro area today, followed by those of Finland and Greece, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
Euro-area government securities returned 9.9 percent this year through yesterday, Bloomberg World Bond Indexes show. Germany’s added 6.8 percent and Greece’s led the advance with a 31 percent gain.