Greek bonds drop most since election as default concern builds

Published : Apr 18, 2015 - 15:13 Updated : Apr 18, 2015 - 15:16

Greece's government bonds had their worst week since the aftermath of Syriza's January election victory as the nation failed to make tangible headway in its efforts to secure funding and avoid a default.

The yield on 10-year Greek debt climbed to the highest since December 2012 as the clock ticked down toward almost 1 billion euros ($1.1 billion) of payments due next month. German 10-year bonds rose in the week, pushing yields below 0.1 percent for the first time, after European Central Bank President Mario Draghi said that the institution's 1.1 trillion-euro bond-buying program must be implemented in full to work.

"Greece is coming to the fore again," said Lyn Graham- Taylor, a rates strategist at Rabobank International in London. "It seems to be a very difficult position. You've got to think they will avoid a messy default but there is a risk. Greece yields will probably carry on rising."

Greece's 10-year yield climbed 166 basis points, or 1.66 percentage points, this week to 12.90 percent as of 5 p.m. in London on Friday. The 3 percent security due in February 2025 fell 6.095, or 60.95 euros per 1,000-euro face amount, to 48.705. That's the steepest drop since the week ended Jan. 30.

Ministers Meet

Representatives from the Syriza government that took power in Jan. 25 elections are set to continue negotiations with international creditors next week, and a meeting of euro-region finance ministers is scheduled for April 24.

While a default may risk Greece being forced to exit the currency bloc, the country's major creditors are not ready to let it drop out of the euro as long as Prime Minister Alexis Tsipras shows willingness to meet at least some key demands, according to two people familiar with the discussions.

At stake is the country's 313 billion euros of government debt. Greece must make payments to the International Monetary Fund of 200 million euros and almost 800 million euros in the first two weeks of May. Funds may be exhausted by May 12, when the second payment is due, Standard & Poor's said Wednesday, when it downgraded Greece to CCC+ from B-.

Spain's 10-year yield climbed 22 basis points to 1.45 percent this week. While that's up from a record-low 1.048 percent reached last month, it's still less than a fifth of the euro-era record 7.751 percent reached in July 2012 when the regional debt crisis raised concern the euro area would splinter.

Negative Yields

Even with an increase in yields, Spain's bonds are being insulated from a selloff of the same scale as 2012 by the ECB's quantitative-easing program. Draghi said Wednesday that the plan is so far proceeding smoothly and concern that the buying is creating a scarcity of securities is "premature." He was speaking in Frankfurt after an ECB policy meeting where officials maintained interest rates at record lows.

The yield on German 10-year bonds dropped eight basis points in the week to 0.08 percent, and touched 0.049 percent on Friday, the lowest since Bloomberg started tracking the data in 1989.

Yields on German benchmark bonds due in as many as nine years are now below zero, while the average yield to maturity on securities in the Bloomberg Germany Sovereign Bond Index turned negative for the first time this week.

Greek government debt lost 16 percent this year through April 16, the biggest drop among sovereign markets tracked by Bloomberg World Bond Indexes. German securities gained 4.4 percent and Spain's added 2.9 percent, the indexes show. (Bloomberg)