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.
Australian bills – The jury must now be out over whether the next move from the Reserve Bank is up or down for monetary policy. The flood of fear that washed up over markets during the last two weeks subsided over the last two sessions driving implied yields higher. The money market remains finely balanced with the recent bout of risk aversion forcing dealers to predict an imminent interest rate cut from the central bank. The hope for resolution towards the sovereign debt crisis starting with the success of Wednesday’s Athens vote has unwound such expectations for now. Bill yields jumped by 15 basis points Wednesday while government bond yields rose by 10 basis points to 5.21%.
Canadian bills – A dose of inflation hit Canada according to the May consumer prices report, which showed prices rose between months by 0.7% and more than twice the anticipated rate. Yield traders were already in cautious mood as the perceived need for the safety of bonds was already falling ahead of the Greek parliamentary vote. Implied yields rose as the report rocked money dealers who had assumed that the Bank of Canada was on indefinite hold in terms of its monetary policy after Governor Carney forewarned that a nearby inflation blip would return to target in a year’s time and almost by definition, would be non-threatening. A jump in energy and food costs has clearly given investors cause for concern with futures traders hedging their bets after a slide in short-dated yields. Bills of acceptance futures tumbled by eight basis points while the yield on the government bond jumped by seven as the spread between the U.S. and Canada widened by one basis point.
British gilts –Front-month short sterling futures rebounded after the Greek vote on an easing of liquidity concerns while far-dated futures were sold and fared double-digit losses beyond the 2012 strip. A dip in an index of services confirmed the dull economic outlook but the fixed income market followed the lead of other bond markets where easier rate expectations continue to be unwound. The yield on the 10-year government bond rose by six basis points beyond the Greek approval on Wednesday with the September gilt future falling by 71 ticks to 120.72 towards the close of electronic trading.
Japanese bonds –Japanese government debt fell following a report showing a rebound in output during May. Industrial production jumped by 5.7% between months. The approaching Greek vote had the same effect on investors’ appetite for Japanese debt as for other bonds. The dissipating safety allure forced some selling with futures expiring in September losing 25 ticks pushing the benchmark yield up to 1.11%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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