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31 August 2011

FN: EFSF yields hint at investor worries


Yields on the bonds issued by the European Financial Stability Fund, which was set up to bail out struggling economies, have stayed high in August despite eurozone bond spreads narrowing, suggesting investors remain sceptical about the efforts of governments and regulators to steady the region.

Since the agreement of the most recent Greek bailout by eurozone leaders and the European Central Bank at the end of July, spreads of the sovereign debt issued by Portugal, France and Spain over the benchmark German Bund have narrowed. This movement may have been in part helped by the purchase of debt by the ECB.

However, in the last two weeks of August, the three bonds issued by the European Financial Stability Facility (EFSF), the organisation that is to take over from the European Central Bank in providing bailout funds for deficit-stricken eurozone countries, remained wide. These spreads have almost doubled since May and last week hit their highest point ever over the German Bund, suggesting investors were uncertain of the viability of the institution that could have to hand over billions of euros. It also means that the EFSF may be unable to gain access to cheap credit to help tie over struggling eurozone Member States.

At the close of European markets yesterday, the spread of the 2.75 per cent five-year bond was more than 102 basis points over the German Bund benchmark - around the record high of 103 a few days earlier. In May it had been around 97 basis points. One fund manager said: "We have asked banks to come up with something so that we can hedge the downside risk, but so far we have not found anyone who is prepared to make this move as it might be seen to rock the lifeboat - and no one wants to be seen to be doing that".

Full article (FN subscription needed)



© Financial News


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