Greece’s government bonds may open higher this week after euro-area finance ministers agreed to extend the nation’s bailout funds for four months, avoiding a cash crunch that threatened to push it out of the currency bloc.
The securities of the region’s other higher-yielding nations, including Portugal and Spain, may be boosted by the deal, as concern dissipates that contagion from Greece would spread. Finance chiefs still need to approve a list of economic measures the Greek government will undertake as part of the agreement, leaving the potential for more volatility.
“The biggest political roadblocks to a deal have now been crossed,” Lena Komileva, chief economist at G Plus Economics Ltd. in London, wrote in an e-mailed note. “This creates the setting for a strong market risk rally and some decompression in core yields in favor of peripheral markets on Monday,” she wrote, referring to rates debt from the euro area’s higher-and lower-rated securities.
Greece’s three-year notes posted their first weekly drop this month in the five days through Feb. 20 as negotiations continued on the country’s future financing plans. The yield on the securities increased 78 basis points to 16.62 percent as finance ministers grappled for a plan to extend the bailout program, which was due to expire at the end of February.
The text of the agreement struck in Brussels after European debt markets closed on Friday allows the Mediterranean nation to lower previously agreed targets on reaching a primary budget surplus. That may free up money to meet some of the newly elected Syriza party’s anti-austerity election pledges.
The euro swung between gains and losses in New York after the agreement was announced, falling from its highs of the day versus the dollar on news parts of the deal still needed to be approved by creditors. Greece’s government must submit a list of measures that finance ministers will discuss in a conference call Tuesday. If the deal is approved it will be put to national parliaments.
“The happy ending will still have an effect on global markets, as more investors jump on the risk bandwagon, while some of the hedge trades would be unwound,” Societe Generale SA analysts including Vincent Chaigneau, the Paris-based global head of fixed-income and foreign-exchange strategy, wrote in an investor note. “An extension of the Greek bailout is not fully priced in.”
Bondholders remained relatively calm through the negotiations. The Bloomberg Greece Sovereign Bond Index, a market-value weighted measure of Greek bonds, was at 91.83 on Friday, up 1 percent this year and 26 percent above its five- year average.
At 9.89 percent, Greece’s 10-year yield is also below its five-year average of 13.86 percent, and an all-time high of 44.21 percent set in 2012. That shows the contrast with movements in debt markets earlier this decade, which toppled governments, pushed countries to accept financial bailouts and took the region to the brink of breakup.