Greek uncertainty weighs on low-rated eurozone bonds

Low-rated eurozone bond yields edged higher on Tuesday as investors waited anxiously to see whether Greece’s new anti-bailout government would clash with their European Union partners.

Europe is willing to give Athens more time to pay its debt, eurozone finance ministers agreed on Monday, but will not yield to demands for debt forgiveness demanded by the new SYRIZA-led coalition.

German Finance Minister Wolfgang Schaeuble said on Tuesday Greeks were not suffering because of decisions made in Brussels or Berlin but due to decades of failings by their country’s elite.

At the start of the second trading day since Sunday’s vote, Greek three-year yields shot up 120 basis points to more than 13 percent, while 10-year yields rose 30 bps to 9.52 percent.

“Now it’s a case of wait-and-see,” said Jamie Searle, a strategist at Citi. “We know there are complex negotiations to come between the new Greek government and troika and they will take a while to play out.”

SYRIZA’s triumph in Greece has sent political shockwaves across the bloc. It is forcing mainstream leftists who signed up to policies of fiscal discipline during the euro zone debt crisis to reconsider their position.

The result may boost parties such as Spain’s new far-left Podemos, born out of anti-capitalist street protests by the young unemployed and now leading both mainstream parties in opinion polls.

Ten-year yields in the debt of Portugal, Italy and Spain edged away from record lows, up around 3 bps at 2.17, 1.51 and 1.39 percent respectively.

But the sell-off was cushioned by the prospect of the European Central Bank’s new bond-buying scheme due to begin in March.

Surprised by the inclusion of ultra-long debt in the ECB’s quantitative easing (QE) program, investors have focused a lot of interest in 30-year maturities.

The gap between 10- and 30-year bonds in countries such as Italy and Spain narrowed further on Tuesday.

The Netherlands is also set to tap a bond maturing in 2047 by 1-2 billion euros on Tuesday, debt that some think may fall outside the ECB’s 2- to 30-year buying bucket.

“I think it is out of scope for the QE program as has been defined and it may get left behind in the QE rally,” said Peter Chatwell, senior rates strategist at Mizuho.

“I would like to see good demand as it would indicate good market functioning, but I think we will see soft demand, mainly driven by short-covering.”