Tags: Contagion | Greek Crisis | Euro Zone | Bonds

Contagion From Greek Crisis Engulfs Euro Zone Bonds

Tuesday, 16 June 2015 02:14 PM

Italian, Spanish and Portuguese bond yields leapt on Tuesday in one of the most serious episodes of euro debt contagion since the height of the bloc's crisis.

The selloff, after talks between Greece and its creditors broke down again, lost steam later in the day as some investors sought to cover short positions. But yields on bonds issued by the euro zone's most vulnerable states were on track for their biggest three-day move since at least mid-2013 -- excluding a jump in May during a global bond sell-off.

Similarly sharp moves were seen in 2012 as the crisis peaked, although yields on the three countries' bonds remain far below the highs of above 7 percent hit in that period.

The moves, analysts say, could influence the dynamic of the negotiations between Greece and European leaders, who may have thought that the relative calm in markets during the protracted talks was a sign that investors thought a Grexit was manageable.

"A lot of people, especially in Germany, have seemed relaxed about Greece. We've seen comments saying that if Greece exits it's not such a big thing," said Jean-Francois Robin, head of rates strategy at Natixis.

"The market is just showing exactly the opposite of that."

Athens has to repay 1.6 billion euros in loans to the International Monetary Fund at the end of June and an even larger amount to the European Central Bank next month.

Widely believed to be running out of money, Greece is one step closer to default and a possible exit from the euro zone after the latest talks collapsed on Sunday. This could lead to the imposition of capital controls and eventually push it out of the euro zone, analysts say.

Italian 10-year bond yields rose as much as 15 basis points to 2.48 percent before retreating to last trade 2 bps higher at 2.34 percent. Spanish yields rose 16 bps to 2.55 percent, while Portuguese yields jumped 16 bps to 3.42 percent, before pulling back to trade flat on the day.

They all hit their highest levels since the third or the fourth quarter of last year. Spanish 10-year yields were on course for their eighth weekly rise in a row, the longest such run since at least 1994.

Greek Finance Minister Yanis Varoufakis said in a German newspaper interview that he was not planning to present new reform proposals at a Eurogroup meeting later this week. But the Greek negotiation team was "available at any time" to find a solution with its partners, Varoufakis said.

"The rhetoric is getting more entrenched, it seems less and less likely that we'll get a deal. The impression we're getting is the discussion is starting to shift to whether the firewalls that were set in place over the last three years are going to be sufficient," said David Keeble, global head of fixed income strategy at Credit Agricole.


Germany's EU commissioner said on Monday the time had come to prepare for a "state of emergency."

"There seems to be some panic. It has been said this week would be the week of truth," said DZ Bank strategist Daniel Lenz, although he thought that assessment was an "exaggeration."

Even if there is no agreement at Thursday's meeting of euro zone finance ministers, a deal could still come later, he said.

Some investors, such as Pictet Asset Management and Russell Investments were waiting for the dust to settle to snap up euro zone stocks and bonds - whether a deal to prevent Athens defaulting is reached or not.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, were down 3 basis points at 0.80 percent.

The European Court of Justice's ruling that an ECB bond-buying plan crafted at the height of the crisis was in line with European law had little impact on the market. The plan, called Outright Monetary Transactions or OMT, aims to protect countries that have troubles accessing financial markets on condition that they pursue reforms.

The OMT has never been activated but has been a driver of the bond market rally that started in 2012 and lasted until recently. It is also seen as an important shield against contagion from Greece. The ECB is currently buying bonds as part of a separate trillion euro stimulus program to lift inflation.

The aggressiveness of the recent sell-off in peripheral bonds shows, however, the limitations of the safety nets the euro zone has at its disposal. The still relatively low level in absolute yields shows the market has not yet lost hope that a deal can be achieved.

© 2018 Thomson/Reuters. All rights reserved.

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Italian, Spanish and Portuguese bond yields leapt on Tuesday in one of the most serious episodes of euro debt contagion since the height of the bloc's crisis.
Contagion, Greek Crisis, Euro Zone, Bonds
Tuesday, 16 June 2015 02:14 PM
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