Default Insurance on Greek Debt Surges

April 22 (Bloomberg) — Greek bonds slumped, pushing yields up by the most in almost a year, as the cost to insure the securities against default jumped to an all-time high amid mounting concern it will have to restructure its debt burden.

Yields on two- and 10-year bonds from Greece, Ireland and Portugal all rose to euro-era records this week. Lars Feld, a member of German Chancellor Angela Merkel’s council of economic advisers, said on April 20 that Greek debt restructuring is probable. German bunds gained after Standard & Poor’s put a “negative” outlook on the U.S.’s AAA credit rating, sparking demand for an alternative to Treasuries.

“The key driver behind this new sell-off is the ongoing speculation about possible Greek restructuring,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “The negative review for the U.S. sovereign rating added to the pressure, reminding investors again that the sovereign debt issue is serious and here to stay for the foreseeable future.”

Greece’s two-year yields rose 450 basis points to a euro- era record 23.32 percent as of 4:23 p.m. yesterday in London, the biggest increase since the week ending May 7 last year. The nation’s 10-year bond yields posted a 110 basis-point gain to 14.93 percent. Portuguese 10-year government bond yields rose to a euro-era record of 9.43 percent. The yield on the nation’s two-year note climbed 165 basis points to a record 10.85 percent. Ireland’s two-year note yields rose 254 basis points in the week, reaching an all-time high of 10.77 percent, while its 10-year bond reached a record 10.48 percent.

Credit-Default Swaps

Earlier this month, Portugal became the third euro-region country to seek an international bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the currency bloc a year ago and then engulfed Ireland.

The cost of insuring Greek sovereign debt jumped to a record 1,325 basis points according to CMA prices for credit default swaps, signaling a 67.4 percent chance of default within five years, even as Greek officials said they have no plans for a debt restructuring. Portuguese default swaps rose to 646, also a record.

“The yields continue to widen in double-digits even as some risk-sentiment returns to the market,” Leister said. “That suggests that despite the levels reached so far it doesn’t preclude a further widening.”

Bunds Rise

German 10-year bunds rose over the week, pushing the yield down 10 basis points to 3.27 percent. The country is set to auction 6 billion euros of 10-year debt on April 27, while Italy plans to sell index-linked bonds maturing in 2016 and 2021.

European government bond markets are closed on April 22 and 25 for holidays. Trading will resume on April 26.

Consumer prices in Germany are forecast to rise 2.4 percent from 2.3 percent in March, according to the median estimate of 12 economists surveyed by Bloomberg News before the April 27 report.

German government bonds have handed investors a loss of 2.1 percent this year through yesterday, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greece’s has declined 8.7 percent, Portugal’s 12.3 percent and Ireland’s 5 percent.

Read more at Andy Sutton’s Extemporania