As word quickly spread of the ‘yes’ vote in Athens, investors sold government bonds thinking that the world could soon resume normal trading activity. The slide in bond prices came to a sharp halt, however, as investors mulled the future, which in reality has changed very little. Greece remains heavily indebted and with a mother lode of outstanding commitments that it can’t repay without taking handouts from its neighbors. The price of this helping hand is the decimation of its own economy through stringent spending cuts and looming unemployment. And so the crisis lurches on until we learn in due course whether or not the fiscal measures are indeed working. First, a second vote must be passed on Thursday that will implement the approved €78 billion austerity package.
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European bond markets –Optimism had been brewing since the weekend that Greek politicians would vote narrowly in favor of the austerity bill. Bond yields that slumped to seven-month lows on Friday had already been rising since then. And the typical response was to buy peripheral nations’ debt and sell German bunds in relief that the drama didn’t take on a whole new lease of life. The capitulation for the September German bund contract came shortly after the vote was passed with the future reaching 126.60 forcing the bund yield higher to 2.97%. But the selling was quickly exhausted amid heavy volume of almost 1.2 million contracts. Pressure on the short-end of the curve was also lifted in response to the vote with the sound of ECB Governor Trichet’s earlier words still resounding in traders’ ears. He promised that the central bank was still in vigilant mode, which assures a rate rise at next week’s meeting of the board of governors.
Eurodollar futures – The U.S. Eurodollar yield curve steepened after Greek lawmakers followed the advice of Papandreou to approve the austerity package. Liquidity fears eased in Europe allowing for a softer tone to dollar cash prices in the interbank market. Short dated Eurodollar contracts rose by about as much as contracts expiring beyond 18 months slid. The result was an approximate 10 basis point change in the curve as shown by the June 2012/June 2013 calendar spread widening by that amount to 64 basis points. Treasury yields rose to the highest in two weeks by lunchtime with the benchmark Treasury priced to yield 3.08%. Two earlier auctions of two-and-five-year paper went badly with further supply at the seven-year maturity scheduled for Wednesday. Demand fell as bond prices rose to the highest in seven months.