Bond spread reaches record high

The premium at which investors want to buy Greek government bonds over benchmark German Bunds hit a record high yesterday. The Greek/German 10-year spread touched 273 basis points, the most since before the inception of the euro. Last week’s downgrade of Greece’s sovereign rating by Standard & Poor’s has put further pressure on bond spreads that have been widening recently. The downgrade was followed by comments from Fitch Ratings that it might also lower Greece’s sovereign credit rating in coming months in the absence of any meaningful reform by the government. Irish 10-year government bonds have also been among the major underperformers in the European Union, causing their spreads over benchmark German bonds to widen sharply. The 10-year spread blew out to 241 basis points from around 216 basis points earlier this week. Patrick Jacq, strategist at BNP Paribas in Paris, said the trend of widening spreads was likely to continue. «We’ll have a lot of (government) guaranteed debt in the pipeline because banks have little opportunity to borrow without this kind of guarantee, at least for the moment,» he said. «As for government bonds, fiscal deficits are rising quite sharply as there are all these rescue plans to finance, so you have to go to the market. All this paper coming into the market makes it difficult to absorb.» Meanwhile, orders for Greece’s 5-year benchmark euro bond have exceeded 5 billion euros with the issue likely to be priced at the tighter end of the range, an official at one of the banks managing the sale said. «The order book is well over 5 billion euros, there is solid participation. It will likely be priced at the tighter end of the range,» the official said. Greece set guidance on the 5-year euro benchmark government bond at mid-swaps plus 260-270 basis points. (Kathimerini, Reuters)

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