Sunday September 21, 2014 Search
Weather | Athens
27o C
19o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Greek selloff shows rush for exit recalling crisis

David Goodman & Eshe Nelson

Bondholders in Europe just got a wakeup call.

After a four-month rally in euro-region debt, yields on Italian and Spanish bonds had their biggest one-day jump in almost a year last week as a selloff that started in Greece spread. With bids evaporating and prices sliding, traders poured into derivatives as they rushed to protect against losses. Italy’s and Spain’s bonds extended that slump today.

Even with borrowing costs from Ireland to Italy near record lows, the sudden price swing shows they’re not immune to the bouts of volatility that characterized the four-year debt crisis. The risk is that speculative traders, who bought debt on the assumption the European Central Bank would support the market, may try to flee at the same time if the outlook darkens.

“You only know how wide the door to the exit is when there are a few of you trying to push through at the same time,” Michael Riddell, a London-based fund manager at M&G Group Plc, which oversees the equivalent of $417 billion, said on May 16. “I don’t think liquidity has been that great in peripherals at any stage.”

Greece’s 2 percent bond maturing in February 2024 dropped 3.095, or 30.95 euros per 1,000-euro ($1,372) face amount, to 75.3 on May 15, the biggest outright decline in price since the securities were issued in March 2012.

Yield jump

Yields on the 10-year debt surged 51 basis points, or 0.51 percentage point, to 6.81 percent, the biggest jump since June 2013. They extended the move the following day to leave the rate at 6.86 percent at the end of last week, the highest close since March 27.

Prices plunged in the wake of opinion polls suggesting the nation’s governing coalition was losing support before local- government votes and European Parliament elections on May 25. Prime Minister Antonis Samaras’s coalition partner Pasok, which dominated Greece’s politics for three decades, was ranked sixth in a poll with 5.5 percent as voters blamed the party for the country’s economic meltdown.

The first round of local and regional elections in Greece ended yesterday with no single party wining enough support to declare a decisive victory.

Small sales, big impact

As contagion spread on May 15, Italy’s 10-year yield, which touched a record low earlier that day, rose 19 basis points to 3.10 percent. That’s the biggest increase since June 24.

The yield on the securities rose eight basis points to 3.14 percent at 9:45 a.m. London time today and the rate on similar- maturity Spanish bonds increased seven basis points to 3.03 percent. The yield on Greek 10-year debt dropped seven basis points to 6.79 percent.

“Just a small wave of sales is enough to have a large impact on prices” for Greek securities, said Alessandro Giansanti, a fixed-income strategist at ING Groep NV in Amsterdam. “A dry-up in liquidity happens every time there is a re-elevation of credit risk in low-rated bonds. The market was substantially overweight on peripheral countries and this has amplified the movement.”

An overweight position means an investor holds a bigger percentage of the debt than is contained in the indexes used to measure performance.

Calmer markets

Spain’s 10-year bonds joined the May 15 selloff, with yields rising 16 basis points to 3.02 percent. While that’s the biggest increase since June 24, a move of that size wouldn’t have been in the top 20 largest increases in 2012.

That’s a sign of how much the euro-area markets have calmed amid a rally sparked by ECB President Mario Draghi’s assertion in July 2012 that he’d do whatever was necessary to hold the currency bloc together. Encouraged by signs of an economic recovery, Ireland, Portugal and Greece have returned to bond markets after receiving international aid. The prospect of additional ECB stimulus, including potential purchases of debt, is helping to propel prices higher still.

Even after the selloff, Spain’s 10-year bonds yielded 167 basis points more than similar-maturity German securities at the end of last week, little changed from April 1. That compares with 222 basis points at the end of last year, and almost 650 basis points in July 2012.

“Our initial assessment is that the peripheral spread widening reflects short-term positioning issues rather than a more substantial rethink on euro sovereign spread risk,” Morgan Stanley analysts including London-based Anthony O’Brien wrote in a May 16 client note.

Futures volumes

Investors were prompted to turn to the derivatives market instead of trading cash securities. Volume on the front Italian BTP bond future jumped to a record of about 165,000 contracts.

“Prices started to drop quickly and suddenly there was a rush for the exit or a rush to hedge via the futures,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. The derivatives are “the most convenient instrument if you need to change your position quickly,” he said.

In a further sign of reduced market liquidity, the difference between bids and offers on the Greek 10-year securities increased to as much as 17 basis points during the May 15 selloff, compared with an average 12 basis points in the previous 28 days, according to data compiled by Bloomberg. The spread stayed at around 15 basis points the following day.

German 10-year bunds, Europe’s benchmark government securities, had a spread of less than half a basis point between bids and offers last week.

The potential for ECB stimulus will continue to draw investors into peripheral bonds and cause yields to fall relative to benchmark securities, according to Norbert Aul, a European rates strategist at Nomura International Plc in London.

Even so, events last week show “spread compression in the periphery is not a one-way street,” he said. “The magnitude on a pullback is amplified when liquidity is drying up.” [Bloomberg]

ekathimerini.com , Monday May 19, 2014 (13:42)  
Record sum of new debts to the state in August
‘Greece can meet its needs on its own’
Cyprus civil servants´ strike called off
Elliniko investors eye Cyprus project warily
Results of probe into 20 Lagarde list names due soon
Members of the Financial Crimes Squad (SDOE) and tax inspectors involved in an investigation into the so-called Lagarde list of Greeks with Swiss bank accounts expect to be able to announce ...
Police refute reports of Jihadi training
Greece is not a training ground for Jihadis, the Greek police said in a statement released late on Friday in response to reports in the local media claiming that radical Islamists have been ...
Inside News
SOCCER
Triumph for PAOK, historic result for Asteras in Europa League
Greek teams produced a patchy record on the opening night of the Europa League group stage on Thursday, as PAOK thrashed Dynamo Minsk, Asteras Tripolis snatched a draw at Besiktas and Panath...
SOCCER
Financial crisis forces Greek second division postponement
Greece's second soccer division Football League announced on Wednesday the postponement of the start of the season due to financial difficulties being faced by most clubs. "The board of dire...
Inside Sports
COMMENTARY
Universities threatened by transfers
The problem arising from the abuse of the Greek university transfer system – whereby some students are allowed to move to an institution of their choice instead of the one they were admitted...
EDITORIAL
Capital changes
A sizable part of the middle of the Greek capital has been slated to receive a significant makeover with the implementation of an urban restructuring project which includes turning a key cit...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Results of probe into 20 Lagarde list names due soon
2. Police refute reports of Jihadi training
3. Gov’t drafts plan to secure exit from memorandum
4. Greek commuters have relatively long wait
5. IKA uncovers benefits scam at Kerameikos branch
6. Man dies in well accident
more news
Today
This Week
1. ‘Greece can meet its needs on its own’
2. Record sum of new debts to the state in August
3. Results of probe into 20 Lagarde list names due soon
4. Police refute reports of Jihadi training
5. Gov’t drafts plan to secure exit from memorandum
6. Special guard arrested over extortion, bribery
Today
This Week
1. Greece on standby
2. Greece at bottom of social justice scale among EU28
3. Central Athens traffic restrictions back in force on Monday
4. Lost in the fog
5. ‘Greece can meet its needs on its own’
6. Record sum of new debts to the state in August
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.