Turbulence looms as Deutsche Bank says Greek referendum negative

Prime Minister Alexis Tsipras’s call for a referendum on creditors’ demands may spark turbulence at Monday’s market open, in stark contrast to the confidence gained among euro-area bondholders this week that Greek aid talks would be successful.

Tsipras set the vote for July 5 – after the scheduled expiration of Greece’s June 30 European bailout deadline – and Greek ministers, including the defense chief, urged the country to vote “no.” That may shatter investors’ faith that a deal to keep Greece in the euro area would be reached, dimming the appeal of bonds from the region’s lower-rated nations such as Spain, whose 10-year bonds just posted their biggest weekly gain in four months.

“We would consider the recent turn of events as a particularly negative market outcome,” George Saravelos, foreign-exchange strategist at Deutsche Bank AG in London, wrote in an e-mailed note to clients. “The question of Greece’s euro- zone membership has been officially opened.”

Officials had been negotiating almost around the clock to find a breakthrough before the euro-area portion of Greece’s current bailout expires at the end of the month, coinciding with a 1.5 billion-euro payment due to the International Monetary Fund.

Banks from Credit Suisse Group AG to UniCredit SpA have warned that capital controls were possible as soon as Monday in the absence of a deal.

Contagion Risk

Those warnings hadn’t thus far sparked a panic among bondholders.

Spain’s 10-year bond yield fell 16 basis points, or 0.16 percentage point, this week to 2.11 percent as of 5 p.m. London time on Friday, the steepest decline since Feb. 27. The 1.6 percent security due in April 2025 rose 1.395, or 13.95 euros per 1,000-euro ($1,115) face amount, to 95.51.

And although talks between Greece and its creditors had whipped up intraday volatility, the yield difference, or spread, between Spanish and German 10-year securities, seen as a marker of investors’ demand for safer assets, narrowed. It decreased to 119 basis points on Friday, from 152 basis points at the end of last week.

The spread widened to as much as 650 basis points in July 2012, when contagion from the region’s debt crisis that had its epicenter in Greece threatened to break up the currency bloc.

“The logic is that if a Grexit is postponed then contagion is less of a problem, so that goes to the benefit of Spain and the rest,” Marius Daheim, a senior rates strategist at SEB AB in Frankfurt, said before the referendum was announced. “But these are news-driven short-term moves which could reverse if something goes wrong.”

The yield on Italian 10-year bonds fell 13 basis points to 2.15 percent this week, the biggest drop since March.

Germany’s 10-year bunds yield added 17 basis points to 0.92 percent after optimism an agreement would be found dimmed demand for the safest fixed-income assets.