German bonds advanced after a Greek referendum rebuffed the austerity measures required by creditors in return for financial aid, pushing investors to seek the euro-region’s safest fixed-income assets.
Sixty-one percent of voters backed Prime Minister Alexis Tsipras’s rejection of the bailout plan. While Italian and Spanish securities declined, the losses were only the steepest in a week. Greek Finance Minister Yanis Varoufakis said he was quitting his post hours after his government triumphed, saying his presence would hamper aid talks.
“The strength of the ‘no’ vote in the Greek referendum comes as a shock to the market, and all safe-haven trades should benefit,” Peter Chatwell, a rates strategist at Mizuho International Plc in London, wrote in a note to clients on Sunday.
The yield on German 10-year bunds, the euro area’s benchmark sovereign securities, fell six basis points, or 0.06 percentage point, to 0.73 percent as of 8:30 a.m. London time, having dropped six basis points on July 3. The 0.5 percent security due in February 2025 rose 0.57, or 5.70 euros per 1,000-euro ($1,106) face amount, to 97.89.
Italian 10-year bond yields added eight basis points to 2.33 percent, the biggest increase since June 29.
That day, the first trading session after the referendum was announced, the yield jumped as much as 57 basis points to 2.72 percent, the highest since October, as the vote raised the potential for an exit from the currency bloc. Through the day more than half that move was eroded on optimism the European Central Bank would be able to limit the fallout from the Greek crisis.
“The market was on alert for a negative surprise this weekend, and we already had a test run of ‘Greek disaster-news’ seven days ago,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York, wrote in an e-mailed note. “That ‘training’ will soften the blow in coming days. In any case, the next 24 hours will signal how resilient euro-zone markets have become.”
The yield on Spanish 10-year bonds climbed eight basis points to 2.30 percent.
How well contagion to the euro-region’s periphery can be limited may in part come down to the response of lawmakers and the ECB.
Prime Minister Alexis Tsipras has argued that Greece would be able to secure a better deal on financial aid with a “no” vote and that it wasn’t his intention to lead his nation out of the currency union. And two officials familiar with negotiations signaled last week that euro-area finance ministers could start work on a third bailout agreement even if voters rejected the aid proposal.
A “no” vote “doesn’t necessarily mean anything more than further discussions and more uncertainty. It doesn’t mean euro exit at all,” said Steven Major, the global head of fixed-income research at HSBC Holdings Plc in London.
While the ECB has frozen the level of emergency aid available to Greek lenders, its 60 billion-euros-a-month quantitative-easing policy may temper the selloff in the region’s so-called periphery. In an ad-hoc meeting between the central bank and its bond market contacts on June 29, traders said they didn’t expect additional action from the institution in the near-term, while saying vigilance was required.
“For the bond market, I think any increase in periphery bond yields is an opportunity to pick up assets,” HSBC’s Major said.
For the past week, Greece’s banks have been shut and capital controls imposed. The stock market has also been closed and the Bank of Greece halted dealing of government bonds on its electronic trading platform. The nation became the first developed country to miss a payment to the International Monetary Fund when it skipped a $1.7 billion obligation last week.
The Washington-based lender estimates that Greece will need at least another $40 billion in international support, as well as easier terms on outstanding debt, to keep its finances manageable.
Greek government bonds have lost 23 percent this year through July 3, compared with a 1.5 percent decline for the euro area overall, according to Bloomberg World Bond Indexes. The Mediterranean nation is scheduled to sell 1.25 billion euros of Treasury bills on July 8.