Edgy investors ditched lower-rated euro zone government debt on Wednesday, sending Greek bond yields soaring to new highs after officials showed little sign of progress on a new deal to tackle Greece's crisis. Differences of opinion between policymakers on how to involve private holders of Greece's debt in a new bailout package have heightened uncertainty in financial markets, pushing Greek, Irish and Portuguese bond yields to euro-lifetime highs.
"Hopes get dashed more and more that we won't get a waterproof solution by the end of next week," said Commerzbank rate strategist David Schnautz.
"This is placing another big layer of uncertainty over everything and it sounds like you don't want to be that much invested in the periphery at the moment,"
Ten-year Greek bond yields rose above 18% for the first time since the launch of the euro — a yield around 15 percentage points higher than that on the region's benchmark German Bund.
Equivalent Portuguese and Irish spreads versus Bunds also widened to euro era record levels and credit default swap monitor Markit said the cost of insuring debt from all three bailed-out countries had hit new highs.
Greek bank shares fell by 4% and the Thomson Reuters Peripheral Banking Index was down 3.23%, sharply underperforming the European FTSEurofirst 300 index.
The latest rise in already sky-high peripheral bond yields came after an informal meeting of euro zone finance ministers reached no consensus on how to structure a fresh aid package for Greece.
That pushed the focus onto Friday's meeting between euro zone heavyweights France and Germany as investors continue to search for sign that policymakers are nearing an agreement.
Though market confidence was rattled, expectations remained that a summit of European leaders on June 23-24 would bring an announcement.
"If they do come up with a package we'll see a knee-jerk re-tightening, but I don't think it will be that sizeable and I don't think it will be that long lived, such is the erosion in confidence we've seen," said Lloyds Bank strategist Charles Diebel.
Ultimately a failure to reach a deal may lead to Greece defaulting on its obligations in coming months — an outcome that would have a more pronounced impact on some the bloc's larger economies which are currently fending off investor concerns over their debt levels.
"The ones that have the most to lose from a default are the ones that aren't actually defaulting … Spain and Italy would probably suffer proportionally the most," Diebel said.
German Bund futures rose by as much as 35 ticks to 125.76 in early trading, but a more pronounced rally failed to materialise. The contract was last 24 ticks up at 125.65.
Technical charts showed mixed signals over how much further Bunds had to rise, prompting Commerzbank to recommend a neutral exposure for the day's session.
SCHATZ VALUATIONS STRETCHED
The prolonged flight to quality has pushed Bund futures up by nearly six full points in the last two months, causing investors to bid more cautiously at Germany's two-year Schatz auction.
The bid-cover ratio came in at the lowest this year as analysts said valuations were becoming stretched, especially with the European Central Bank looking set to raise its benchmark interest rate again next month.
"People are not bidding that much as probably more people are expecting yields to rise in the weeks ahead," DZ Bank strategist Glenn Marci said.
Two-year German yields in the cash market were last at 1.58%, down 1 bp on the day. Ten-year yields were also down 1 bp at 3.008%.
