Euro-area bondholders are gaining confidence that a last-minute deal can be found for Greece.
While in the last 24 hours Greece missed a payment to the International Monetary Fund and its European bailout expired, Italian and Spanish securities have risen for a second day. They extended gains and German bunds fell after a letter from Prime Minister Alexis Tsipras showed he offered to accept proposals from Greece’s creditors to end a standoff over its aid program, subject to certain conditions.
“The market is still hoping for a last-minute deal,” said Felix Herrmann, a market analyst at DZ Bank AG in Frankfurt. “There’s still a chance Greece can survive all this. At the same time, the market also knows the mechanisms that were installed are strong enough to cope with a Greek exit or Greek default.”
The reaction in bond markets is a contrast to the region’s last debt crisis, when Italian and Spanish yields soared amid concern the turmoil would spread to other indebted countries. Strategists said that’s a sign that even the worst-case scenario could be contained by the euro area’s firewalls.
Italy’s 10-year bond yield fell five basis points, or 0.05 percentage point, to 2.29 percent as of 4:47 p.m. London time, after dropping as much as 13 basis points. The 1.5 percent security due in June 2025 rose 0.39, or 3.90 euros per 1,000-euro ($1,109) face amount, to 93.15.
While the yield climbed 24 basis points on Monday after a weekend of turmoil in Greece, that was only the biggest increase since May 5. In November 2011, it reached 7.48 percent.
Spain’s 10-year yield dropped three basis points to 2.28 percent, while that on German bunds, the euro area’s benchmark sovereign securities, climbed five basis points to 0.82 percent.
Bonds in the so-called periphery pared gains after Tsipras went onto national television to ask voters to reject the austerity demanded by creditors as a condition of aid, which will be put to a referendum on July 5.
While more people still intend to vote “no” in the referendum, their number has fallen since the closure of Greek banks, according to a poll for Athens-based Efimerida ton Syntakton newspaper.
In a televised address, Tsipras said that a ‘no’ this weekend would be a decisive step toward a better deal and that it wasn’t a vote on quitting the euro. He said he had no intention of leading Greece out of the currency union.
“Greece is in arrears to the IMF, opinion polls show the ‘no’ side with a significant lead ahead of the referendum, albeit with signs that lead is falling in the face of empty ATMs, and yet markets are calm,” Kit Juckes, a London-based strategist at Societe Generale SA, wrote in a note to clients. “The consensus view expects Greece to reach a deal with creditors and remain in the euro,” which “may be right, but seems complacent to me.”