Greek yields hit record highs; no respite seen

LONDON: The yield on two-year Greek bonds rose by more than 200 basis points on Wednesday as a steep selloff sparked by fears the country would have to restructure its debt showed no sign of easing.

Yields rose all along the Greek yield curve, with the short end hit especially hard as investors priced in a growing probability that they will have to cut some sort of deal.

Markets are increasingly considering a scenario under which investors are asked to accept lower coupon payments, wait longer to have their investment returned, or even to accept haircuts on the face value of their bonds -- despite repeated denials by officials from Greece and the EU.

‘There's a massive fear of restructuring and if we're talking about (face value discounts of) 50 percent then the front end is hugely vulnerable,’ said Padhraic Garvey, strategist at ING in Amsterdam.

Two-year Greek debt issued with a coupon of 4.6 percent now yields nearly 27 percent, having risen by more than two percentage points on the day, and trades at 67.96 percent of its face value -- though traders said liquidity was almost non-existent and had exaggerated volatility.

For a 50 percent haircut to be fully anticipated, that price would need to drop to around 50, resulting in yields of more than 40 percent, Garvey said.

Prices on Greek bonds plummeted in April after comments from German officials suggested policymakers had considered a restructuring of Greece's debt, sparking a debate among politicians and within financial markets over whether Athens could continue to manage its debt under its current bailout plan.

Despite the sharp repricing already seen -- which has pushed Greek 10-year yields to their highest since at least mid-1995 -- analysts said further losses were likely at the short end.

‘Depending on what type of scenario you believe in and what type of investor you are, your fair value for holding (Greek government bonds) is vastly different,’ said Christoph Rieger, strategist at Commerzbank in Frankfurt.

‘Levels at 50 or just below should provide some support, with the decline at least slowing down ... should we really reach levels in the mid-40s, for some speculative investors this will become a buying opportunity again.’

MANAGING CONTAGION RISK

Debt issued by other lower-rated euro zone states enjoyed a less volatile session, with Portuguese, Irish and Spanish bonds showing little spillover from the selloff in Greek bonds.

Yields have been dragged higher in other peripheral countries over the last week, but signs of a decoupling from Greece -- particularly for the currency bloc's fourth largest economy, Spain -- were encouraging.

‘Clearly the entire discussion surrounding a Greek debt restructuring has shown over the past sessions that contagion risk is still present,’ RBC Capital Markets strategist Norbert Aul said.

‘But there are different fundamentals, different economies, different size of debt markets and also the determination of EU governments will clearly be strongly in favour of keeping contagion away from the Spanish and Italian government bond market.’

Bunds failed to gain much momentum from the ructions on the periphery, with Bund futures falling over half a point to 121.89 after a German sale of 10-year Bunds drew tepid demand and as US debt futures fell ahead of a five-year T-note sale.

Ten-year Bund yields were up 1.2 bps at 3.257 percent while two-year yields rose 3 bps to 1.764 percent.

Bunds last yielded around 7.5 basis points less than their US equivalent with the closely-watched spread between the two little changed after the Federal Reserve signalled it was in no rush to begin monetary tightening.