Euro bond traders brace for gyrations whichever way Greeks swing


With Greece divided as it heads into Sunday’s referendum on austerity, one thing looks certain: The bond market is set for another volatile week.

Price swings in European bonds approached the highest level in three years before the July 5 vote, in which Greeks will decide whether to accept the reforms demanded by creditors as the cost of a bailout. A poll commissioned by Bloomberg showed 43 percent intended to vote “no” to the proposal, with 42.5 percent backing a “yes” result.

“We could see large market moves on Monday as the outcome looks very uncertain,” said Mark Dowding, a London-based partner and money manager at BlueBay Asset Management LLP. “Even if there’s a ‘yes’ vote, there remain many political obstacles to Greece securing a new bailout package. A ‘no’ vote, and markets will react in a risk-off fashion.”

A “yes” result is likely to spark a rally in bonds from Europe’s most-indebted nations and a selloff in its safest assets such as German bunds, strategists said. A rejection of creditors’ terms would probably mean the opposite because it may push Greece closer to exiting the euro area.

Bunds, the euro area’s benchmark sovereign securities, have been supported since Greek Prime Minister Alexis Tsipras called the referendum last weekend. The decision has meanwhile weighed on Spanish and Italian bonds, which declined in the week before rallying on Friday.

Even so, contagion to the bonds of these higher-debt euro- zone nations has thus far been limited amid optimism the European Central Bank will be able to contain the fallout from the mounting crisis.

Spanish 10-year bond yields rose 10 basis points, or 0.1 percentage point, last week to 2.21 percent, though that’s still about five percentage points below their euro-era high of 7.75 percent in July 2012.

Italy’s 10-year bond yield jumped 10 basis points last week to 2.25 percent, while that on German debt dropped 13 basis points to 0.79 percent.

“Most investors are trying to stay neutral versus their benchmark before the vote,” said Luca Cazzulani, senior fixed- income strategist at UniCredit SpA in Milan. “The higher the margin of the ‘yes’ vote, the more risk-on trade we’re likely to see.”

Euro-area sovereign bonds handed investors a 5.4 percent loss in the second quarter, the worst performance on record, according to Bank of America Merrill Lynch’s Euro Government Index, which tracks data back to the end of 1985. The declines were led by an 18 percent slide in Greek securities, with Spanish bonds losing 6.1 percent and German bonds sliding 4.5 percent.

Implied volatility on German 10-year bund futures rose to 8.2 percent on Friday, from 5.8 percent at the end of May. It reached 9.5 percent on May 14, the highest since June 2012.

JPMorgan Chase & Co. said it anticipates Greeks will accept creditors’ terms on Sunday, prompting Tsipras to resign and the formation of a new national-unity government.

Even if that is the outcome, it would still take time for Greece to secure a new bailout deal, said Malcolm Barr, a London-based economist at the U.S. bank.

“Even our central view of a ‘yes’ vote still leaves a lot of things uncertain, still leaves a sense of having to work against the clock,” said Barr. “It’s not by any means comfortable. There’s an urgent need to stabilize the situation.”