July 6 (Bloomberg) -- Italian and Spanish government bonds fell for a third straight day after Moody's Investors Service cut Portugal's credit rating below investment grade, raising concern the region's debt crisis will infect more nations.
Portuguese two-year yields and credit-default swaps surged. The 10-year Italian yield reached the highest since November 2008 as Handelsblatt reported that 40 percent of investors in Germany see contagion spreading to Spain and Italy. German bunds rose the most in almost two weeks, even as the nation prepared to sell 4 billion euros ($5.8 billion) of two-year notes.
"The latest rating move on Portugal succeeded in reintroducing a new round of uncertainty, which will support demand for safe-haven assets, at least in the near term," said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London.
The yield on 10-year Italian securities advanced 11 basis points to 5.10 percent at 8:41 a.m. in London. That pushed the difference in yield, or spread, to similar-maturity German debt 17 basis points wider to 216 basis points. The 4.75 percent securities maturing in September 2021 fell 0.81, or 8.10 euros per 1,000-euro face amount, to 97.74.
Two-year Portuguese yields surged 155 basis points to 14.50 percent. Spanish 10-year yields rose seven basis points to 5.55 percent, increasing the spread over bunds to 258 basis points.
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose six basis points to 236 at 8 a.m. in London. An increase signals deteriorating perceptions of credit quality.
Portuguese Downgrade
Portugal is scheduled to auction as much as 1 billion euros of three-month bills today.
Moody's cut the long-term government bond rating for Portugal to Ba2, or junk, from Baa1, and said the outlook is negative. Discussions to involve private investors in a new rescue plan for Greece make it more likely that the European Union will require the same pre-conditions in the case of Portugal, Moody's said in a statement.
A new proposal on investor participation in a Greek aid plan will be discussed in Paris today, the Financial Times said, citing two people involved in the talks.
Ten-year bund yields fell six basis points to 2.95 percent. They reached 3.05 percent on July 1, the most since June 9. Two- year German note yields also slid, falling four basis points, to 1.61 percent.
A report today will probably show German factory orders dropped 0.5 percent in May after gaining 2.8 percent a month earlier, according to the median estimate of 33 economists surveyed by Bloomberg.
German bonds returned 0.1 percent this year, compared with 2.6 percent for U.S. Treasuries and 2.1 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds handed investors a loss of 15 percent, while Portuguese securities lost 19 percent, the indexes show.
--With assistance from Emma Charlton and Anchalee Worrachate in London. Editors: Keith Campbell, Matthew Brown.
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