Sunday 21 January 2018

Investors turn to German bonds amid fears of further Greek trouble

German government bonds advanced this week, leaving yields within three basis points of their 2010 low, as concern that Greece will struggle to finance its budget deficit fuelled demand for the euro region's safest securities.

Greek 10-year government bonds fell for the third week out of the past four as the European Union's week-old rescue plan failed to quell concern over the country's shortfall -- the biggest in the bloc.

Demand waned at a sale of Greek securities, with a 12-year auction on March 30 raising €390m, less than the €1bn upper limit.

"Bunds have been driven higher this week by demand for safe-haven assets," said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate and Investment Bank in London. "Uncertainty over Greece's ability to fund itself dominated market sentiment."

The yield on Germany's 10-year bund, Europe's benchmark government security, fell seven basis points in the week to 3.09pc in London yesterday. It dropped to 3.05pc on March 23 -- the lowest this year. The two-year note yield slipped five basis points to 0.95pc.

The Greek 10-year yield advanced 33 basis points to 6.56pc, and the two-year yield soared 69 basis points to 5.28pc.

Signs of caution

While European Central Bank president Jean-Claude Trichet said investors would "progressively recognise" the steps taken by Greece, they are still showing signs of caution.

The yield premium investors demand to hold Greek 10-year bonds over bunds, at 345 basis points, is almost six times the 58 basis-point average of the last 10 years.

Investors have flocked to German bunds this year, sending the 10-year yield 31 basis points lower. Bunds returned investors 2.8pc in the quarter to March 31, compared with a 1.2pc gain for US Treasuries and a 2pc loss for Greek bonds, according to Bloomberg/EFFAS indexes.

The aid facility agreed last week -- a combination of IMF and EU bilateral loans -- will only be triggered if Greece runs out of fundraising options.

The debt-laden country's prime minister, George Papandreou, welcomed the plan as "very satisfying".

Irish Independent

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