Bond dealers say the worst is over

Germany’s biggest bond dealers believe that the worst is over for the European Union’s most indebted nations, with Greek government paper gaining favor. Yields on Greek, Spanish, Irish and Portuguese government bonds are set to fall to within 2.2 percentage points of benchmark German bunds on average in the next two years from 4.61 percentage points last week, according to a Bloomberg News survey of 15 banks that trade directly with Germany’s debt agency. HSBC Holdings, Europe’s largest bank by market value, Goldman Sachs Group and Societe Generale advise buying securities sold by Greece. «All the policy backstops have put a floor under the downside risks for peripheral euro-region bonds,» said Michael Vaknin, a senior fixed-income strategist in London at Goldman Sachs. «Spreads are near their records but the EU and International Monetary Fund have pledged their support and opportunities are starting to emerge.» HSBC and Goldman Sachs recommend Greek 30-year bonds as the price languishes at about 50 percent of face value. Societe Generale advises buying three-year Greek notes, betting a rally in two-year debt will extend to longer-dated securities. Bloomberg asked the 32 banks that act as so-called primary dealers at German government bond auctions for their predictions for yield spreads between the 10-year securities of Greece, Portugal, Ireland and Spain versus benchmark bunds. Greek 10-year bonds will yield 638 basis points more than bunds at the end of next year, from 913 in mid-September, according to the survey. The spread will likely shrink to 477 basis points, or 4.77 percentage points, in late 2012. Spread narrowing will be modest this year at 809 basis points, the survey showed. Meanwhile, Reuters reported on Sunday that Greece’s international lenders assured investors at a road show last week that they would not abandon Athens at the end of a three-year bailout plan if it fulfilled tough reforms but failed to regain market trust. Asked what would happen if Greece fully met EU-IMF demands to slash its deficit but failed to convince markets, a source close to the road show said: «In that situation, we would not walk away from Greece. We would not abandon them.»

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