This week’s gains in Italy’s government bonds offered a taste of the pent-up demand waiting for a Greek bailout agreement to take the risk of contagion off the table.
Italian 10-year bonds rose for a fourth-straight day on Friday on speculation Greece’s proposed austerity package would be sufficient to win the nation a financial rescue. The rally faded as the weekend approached, with showdown talks on the plan set to to determine the country’s fate before markets reopen.
“There’s still a 30 percent chance this doesn’t pass Sunday,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. On the other hand, he predicted another “bounce to come on Monday if we get a deal.”
Italian 10-year bond yields fell 11 basis points, or 0.11 percentage point, this week to 2.13 percent at the 5 p.m. London close on Friday. The yield touched 2.01 percent, the lowest since June 2, before the move ebbed toward the day’s end. The 1.5 percent security due in June 2025 rose 0.975, or 9.75 euros per 1,000-euro ($1,113) face amount, to 94.465.
Portuguese and Spanish bonds also rose in the week amid Greece’s efforts to break an impasse that pushed the country to the brink of financial collapse. Greek Prime Minister Alexis Tsipras offered to meet most of the demands made by creditors in exchange for a bailout of 53.5 billion euros. That eased concern Greece would be pushed out of the currency bloc and threaten the stability of other high-debt and -deficit nations.
Though Tsipras ceded ground, he insisted long-term debt needed to be made more manageable to allow Greece to recover from a crisis that has erased a quarter of its economy. Without a deal, the gains in Italian bonds may be at risk.
“The proposal put forward by the Greek government to resolve the current impasse is an encouraging sign, but we would caution against excessive enthusiasm as a number of key obstacles remain for a full agreement,” said Luigi Speranza, a market economist at BNP Paribas SA in London.
While the extra yield that 10-year Italian debt offers over benchmark German bunds dropped by 22 basis points to 124 basis points in the week, it was as low as 84 basis points on March 12.
Adding to potential gains on the conclusion of a Greek deal, the region’s government bonds may also draw support from coupon payments, redemptions and bond purchases by the European Central Bank, according to Commerzbank AG.
“It’s going to be liquidity-on trade due to massive net backflows to investors in July,” said Christoph Rieger, head of fixed-income strategy at the bank, which is the top primary dealer of German bonds.