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Greece, Spain, Portugal feel pressure on bond market

Published on 05/05/2010

The borrowing costs of Greece, Spain and Portugal rose on Wednesday as investors demanded higher interest rates to hold their debt because of persistent concerns about public finances.

The rise in the rates reflects market wariness about Greece’s ability to implement tough austerity measures which were required by international creditors but which sparked new civil unrest on Wednesday.

Portugal, Spain and Ireland have also been under pressure over huge public deficits which have fuelled growing concerns that the Greek debt debacle could spread to those eurozone countries.

The yield on Greek 10-year bonds rose to 9.755 percent on Wednesday compared to 9.168 percent late on Tuesday while the return on two-year bonds rose to 14.301 percent from 13.577 percent.

The rate demanded by investors for Portuguese 10-year bonds rose to 5.601 percent from 5.386 percent the day before.

Despite the rising pressure on its bonds, Portugal successfully raised 500 million euros (646 million dollars) via six-month treasury bills on Wednesday, the debt office said.

Lisbon had to pay a steep price, however, with investors demanding a return of 2.955 percent, four times higher than the last time such bonds were issued on March 3.

The yield on Spanish 10-year bonds rose slightly to 4.127 percent from 4.113 percent late Tuesday, when the Madrid stock market sank on false rumours that Spain was asking for aid from the International Monetary Fund.

“We don’t know what political and financial authorities can do to calm things down, given the current feeling of panic on the markets,” bond strategists at French bank BNP Paribas said in a note.

“Rumours are immediately taken into account, triggering very strong movements. And when the rumours are officially denied, the market has a hard time erasing the previous movements,” they wrote.

“Under these circumstances, and ahead of key events … the current turbulence should persist,” they said, one day before a European Central Bank press conference and general elections in Britain.

Other events monitored by the financial world this week include the German parliament’s vote on Friday on Germany’s share of the 110-billion-euro (145-billion-dollar) eurozone-IMF bailout for Greece.

A government bond carries a fixed annual rate of return in cash terms at issue. The only variable to reflect changes in perceptions about risk-return relationships is therefore the price of the bond.

If risk and interest rates are perceived to be rising, the previous fixed interest on a bond looks unattractive.

The price of the bond falls, until the fixed interest, as a percentage of the new lower price has risen to an attractive level. Hence, a fall of bond prices signals that interest rates for that class of risk have risen, are rising or are expected to rise.