Greek two-year notes slumped, driving yields to a euro-era record, on concern a second bailout for the nation will be delayed because of disagreement on a collateral deal.
Italian two-year notes declined for a second day as the nation prepared to sell 10.5 billion euros ($15.1 billion) of short-maturity debt this week. The European Central Bank bought Italian and Spanish government bonds today, according to people familiar with the transactions. Greek yields surged as risks over fresh aid intensified after the Finnish government said Aug. 16 it secured a collateral arrangement to ensure its contribution would be repaid. Germany sold 10-year bunds.
"There are concerns that the second aid package won't go through," said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. "If Finland sticks to its word and demands collateral, we will be in a gridlock situation."
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Greece's two-year notes slumped, pushing the yield up 2.43 percentage points to a record 42.03 percent at 12:27 p.m. in London. The 4.6 percent security due May 2013 lost 1.64, or 16.40 euros per 1,000-euro face amount, to 59.42.
Italy's two-year rates climbed seven basis points to 3.41 percent, and the nation's 10-year yields increased two basis points to 5.03 percent.
Yield Surge
Yields on Spanish and Italian securities surged to euro-era records at the start of this month amid concern that contagion from the debt crisis, which began in Greece, had infected both countries. The European Central Bank bought government bonds in the past three weeks in a bid to stave off contagion and bring 10-year yields below 5 percent.
Spain's 10-year yields were little changed at 5 percent as people familiar said the European Central Bank bought the nation's debt along with Italian securities.
The purchases were in small volumes and included 10-year notes, according to three people with knowledge of the transactions who declined to be identified because the trades were confidential. A spokeswoman from the ECB in Frankfurt declined to comment when contacted today by telephone.
Greek 10-year yields climbed 53 basis points to 17.95 percent, the highest level since July 20.
Austria and the Netherlands, which both share Finland's AAA credit rating, called for similar collateral deals in return for providing aid to Greece, as did Slovakia and Slovenia.
Europe 'Conflicted'
"The message sent by the calls for such agreements confirms that Europe is conflicted over the very decision to provide financial support to its members, not just the amount of support," Moody's Investors Service said.
Pledges of 365 billion euros in official loans to Greece, Portugal and Ireland, and at least 96 billion euros of bond purchases by the European Central Bank have yet to fix the finances of those countries or prevent speculative attacks on Spain and Italy. Greece remains locked out of the financial markets, forcing European policy makers to put together a second aid deal for the nation.
German 10-year yields rose two basis points to 2.18 percent. They fell to a record low 2.03 percent on Aug. 18 as a global rout in equities and signs the U.S. economy is faltering, sparked demand for the relative safety of government debt.
The nation sold 4.9 billion euros of 2.25 percent bunds maturing in September 2021 at an average yield of 2.15 percent.
Investors bid for 1.44 times the amount on offer. That compares with a so-called bid to cover of 1.16 at the previous auction of similar-maturity debt auctioned on July 13, which were sold at 2.70 percent.
Confidence Falls
German business confidence fell to the lowest in more than a year as a global slowdown and Europe's debt crisis damped the outlook for economic growth, a report showed today. The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 108.7 in August from 112.9 in July. That's the lowest since June 2010. Economists forecast a decline to 111, according to the median prediction of 37 economists in a Bloomberg News survey.
German government bonds have returned 5.7 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned a gain of 7.4 percent. Greek bonds have lost 18 percent, the indexes show.
Bloomberg News
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