Greece Bailout Optimism Sparks Slump in Europe’s Haven Bonds

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Traders’ optimism that a Greek bailout deal will be clinched this weekend triggered the sharpest slump in German bunds in more than a month.

French bonds also fell as demand for haven assets evaporated, while Portuguese securities led gains in peripheral euro-area debt. Greece proposed reforms that met most of its creditors’ demands, fueling speculation the two sides will be able to come together. In exchange it sought a three-year bailout loan of at least 53.5 billion euros ($59.6 billion).

“The market is pricing in that a deal gets done,” said Padhraic Garvey, global head of rates strategy at ING Groep NV in London. “Price action is pretty adamant about that, there’s no ambiguity.”

German 10-year bond yields jumped 17 basis points, or 0.17 percentage point, to 0.89 percent as of 4:33 p.m. London time, the biggest increase since June 2. The 0.5 percent security due in February 2025 fell 1.54, or 15.40 euros per 1,000-euro face amount, to 96.435. Portugal’s 10-year yield dropped eight basis points to 2.85 percent.

The yield on Italy’s 10-year bonds fell three basis points to 2.14 percent, having declined as much as 17 basis points earlier. That cut the extra yield, or spread, that Italian debt offers over German bunds by 20 basis points to 125, the biggest reduction since June 22.

Greek Proposals

“The mood is risk-on today,” said Luca Cazzulani, senior fixed-income strategist at UniCredit SpA in Milan. “Optimism on Greece is spreading and markets are moving in anticipation.”

Italian bonds pared gains as the market prepared for as much as 7.5 billion euros of debt sales on July 13, Cazzulani said.

While Greece has presented its proposals, which include spending cuts, pension savings and tax increases, it’s not out of the woods yet. The reforms will be presented in the Greek Parliament on Friday and officials from across the euro region will meet on Sunday to discuss the measures. That day has been set as a deadline by the European Union for an agreement to be reached.

Greece’s two-year note climbed on the news, with the price jumping 17 cents on the euro to 62.18 cents, the biggest increase since the securities were sold in July 2014. The yield sank 23 percentage points to 31.6 percent.

As well as meeting some of its creditors’ longstanding demands, the Greek government has also proposed the restructuring of its debts and a package of growth measures totaling 35 billion euros.

“The risks going forward are all about execution,” said ING’s Garvey. “Greece will fully expect to see some debt restructuring and that’s where we are going to have continued talks going forward. But that’s for another weekend.”

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