Bond spreads narrow as investors react

Elizabeth Fournier
TEN-YEAR yields on German government bonds jumped by the most in almost three months yesterday and spreads across the Eurozone narrowed, as investors reacted to politicians’ plans by shifting their risk exposure.

German bunds became a less attractive safe haven after the country’s parliament backed an increase to the European Financial Stability Facility, to which it contributes some €211bn.

But at the same time yields on Spanish, Italian and Greek sovereign debt fell, narrowing spreads and suggesting some appetite for more risky assets had returned. The spread between yields on 10-year Greek and German debt fell to 2002.3; down 123.4 basis points from the previous day’s close.

But the credit default swap market yesterday fell off a cliff, after it became clear that the contracts were unlikely to class Greece’s haircuts as a default.

David Geen, general counsel at the International Swaps and Derivatives Association, said that the arrangement was still classed as voluntary.

The Markit iTraxx SovX Western Europe Index of credit default swaps on 15 governments fell 42 basis points to 291 yesterday. The volume of Greekand other CDS trades has collapsed in recent weeks.