Greek bonds plunged, pushing 10-year yields to the highest this month, as speculation grew that the nation’s financial system may be just weeks from running out of cash.
The decline was mirrored elsewhere in the euro-zone bond market, where a two-day rally proved short-lived and investors dumped securities with yields still near historic lows. German bunds joined Italian and Spanish debt to slide for the first time since May 13.
“It’s definitely been triggered by Greece but it’s not that the market is heading toward panic, it’s just the usual market reaction when there’s news-flow like we’re seeing currently,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “There needs to be an agreement soon, otherwise it’s very likely that there’d be a default.”
Greek banks are running short on the collateral they need to access emergency European funding, a potential crisis for Prime Minister Alexis Tsipras after weeks of brinkmanship with creditors. The worst-case scenario could see this lifeline being maxed out within three weeks, according to some economists.
Greece’s 10-year bond yield rose 69 basis points, or 0.69 percentage point, to 11.45 percent as of 12:50 p.m. in London. The 3 percent security due in February 2025 fell 2.775, or 27.75 euros per 1,000-euro ($1,140) face amount, to 54.265 percent of face value.
The Greek two-year note yield surged 350 basis points to 24.42 percent. Benchmark German 10-year bund yields rose three basis points to 0.65 percent, while the yield on Italy’s debt of the same maturity increased 15 basis points to 1.92 percent, after tumbling 12 basis points over the previous two days.
The jump in Italian 10-year yields left them about 40 basis points higher that at the end of April. Investors have cut holdings as higher oil prices and signs of a nascent economic recovery in the region created concern that yields weren’t sufficient to compensate for potential inflation.