Greek Bonds Steady After Moody's Cut On Fresh Aid Expectations
LONDON (Dow Jones)--Greek bonds showed a muted reaction to a downgrade by Moody's Investors Service Inc. Thursday, as traders and investors tried to balance the downgrade with expectations that an additional financial aid package for Greece will be agreed.
The yield spread between Greek debt and German bunds--the additional premium investors demand to hold riskier assets--stayed broadly stable Thursday.
At about 0830 GMT, the two-year spread had widened by eight basis points to 2235 basis points, the five-year spread had widened by seven basis points to 1833 basis points, and the 10-year was quoted five basis points wider at 139 basis points.
Moody's on Wednesday downgraded Greece's long-term debt by three notches to Caa1 from B1, outlook negative. It cited growing concerns that Greece will not be able to stabilise its debt position without a restructuring and said the new rating effectively predicts a 50% chance of a default.
However, speculation has increased that European authorities will agree to provide additional financial aid to Greece, which needs to fill a funding shortfall of around EUR30 billion in 2012 despite the EUR110 billion rescue package agreed last year.
Nomura fixed income strategists said in a note that any new Greek debt package "must be better than a disorderly default" and that any favourable news will see the recent flight-to-quality trade--buying safe-haven assets against selling riskier peripheral assets--begin to unwind with yield spreads contracting.