Bonds fall after recent downgrade

The extra yield investors demand to hold Greek bonds instead of German government paper increased yesterday. Greek government bonds fell, raising the yield by more than 10 percent for the first time since May 10 – the day the European Central Bank began buying debt securities to support a European Union rescue plan for nations struggling to raise funds. The extra yield investors demand to hold Greek 10-year bonds instead of benchmark German Bunds widened to 772 basis points from 711 basis points yesterday. Securities may also be falling, as managers in so-called passive funds sell securities, anticipating their removal from bond indices. Greek bonds will leave indices managed by Citigroup and Barclays at the end of this month after being downgraded to junk status by ratings agency Moody’s. The cost of insuring against losses on Greek government debt also soared to its highest point in more than a month. Credit default swaps tied to Greek sovereign debt surged 58.5 basis points to 908, according to CMA DataVision prices. The contracts rose to a record 940 basis points on May 6, four days before the EU pledged nearly $1 trillion to ease the region’s spreading budget deficit crisis. Meanwhile, European governments will consider imposing a charge on bond sales by countries that violate debt rules in the wake of the Greece-driven fiscal crisis, a draft document showed. Countries that flout debt-reduction pledges could face «a levy in the form of a predefined percentage [number of basis points] on any issuance of government debt,» according to a European Commission proposal obtained by Bloomberg News.