Greek bond drop sends yield to 16-month high on debt wrangling

Greece’s government bonds dropped for a fourth day, pushing the 10-year yield to a 16-month high, amid mounting concern the nation will struggle to renegotiate the terms of its bailout.

The selloff drove Greek three-year yields above the level they reached before European leaders set up a financial backstop for the euro area in May 2010. Italian and Spanish bonds also fell as investors grew skeptical the European Central Bank’s quantitative easing plan would be able to insulate the rest of the region’s debt markets from Greece’s turmoil.

“It doesn’t look as if Athens and Brussels are close to an agreement and this is of course weighing on Greek bonds,” said Felix Herrmann, an analyst at DZ Bank AG in Frankfurt. “At the moment we have the negative spillover effects from Greece outweighing the positive effects for the periphery from QE.”

Greek 10-year yields rose 65 basis points, or 0.65 percentage point, to 10.99 percent at 10:20 a.m. London time. They touched 11.04 percent, the highest since Sept. 23, 2013. The 2 percent bond due in February 2025 fell 2.72, or 27.20 euros per 1,000-euro ($1,130) face amount, to 55.19.

Greek three-year yields rose 203 basis points to 18.76 percent and touched 18.88 percent, the highest since the nation underwent the biggest-ever restructuring in 2012. It peaked above 100 percent before the debt was reorganized.

The three-year yield is up from 10.08 percent on Jan. 23, before the nation held general elections that put a coalition led by the anti-austerity Syriza party.

Austerity Showdown

Greek stocks and bonds have tumbled since the vote as Syriza leader Alexis Tsipras’s plans to boost the minimum wage and halt the sale of state assets set him on course for a showdown with international creditors demanding cost-saving measures in return for financial aid.

Greek bank shares rose on Thursday after Daniele Nouy, head of the European Central Bank’s Supervisory Board, said on Jan. 28 the lenders are capable of surviving the current market turbulence.

Lenders are being closely monitored in light of a “situation that is not as exactly business as usual,” said Nouy, and the ECB is monitoring deposit withdrawals daily after bank-deposit outflows last week accelerated to record levels.

The rate on Italy’s 10-year bond increased five basis points to 1.64 percent and the yield on Spain’s increased five basis points to 1.49 percent.

Italy sold five- and 10-year securities at record-low auction yields of 0.89 percent, and 1.62 percent, respectively.

The German 30-year yield was little changed at 1.02 percent after touching 0.993 percent, the lowest since Bloomberg began collecting the data in 1994.