Bonds Show Greece Risks Persist on Path Set for Bailout Accord

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After surging on news Greece had agreed a bailout, and then tumbling amid concern it would struggle to implement the necessary reforms, Italian and Spanish government bonds settled into an afternoon of moderate gains as traders weighed the euro-zone future of the bloc’s most-indebted member.

“Markets are cautious on potholes that might arise,” said John Davies, an interest-rate strategist at Standard Chartered Plc in London. “This is almost the first concrete step on quite a long road-map toward resolving this crisis. Investors are being wary of getting too far ahead of themselves.”

German bonds erased an earlier drop as investors’ initial confidence about the Greek rescue subsided into renewed appetite for the safest government securities. Strategists said markets were frustrated at the lack of clarity about the terms of the deal hashed out in Brussels, and the Hellenic nation’s ability to enact the reforms required.

Spain’s 10-year bond yield fell three basis points, or 0.03 percentage point, to 2.10 percent at 4:30 p.m. London time. It climbed as high as 2.21 percent and slipped as low as 2.04 percent earlier in the day.

The price of the 1.6 percent security due in April 2025 rose 0.27, or 2.70 euros per 1,000-euro ($1,104) face amount, to 95.63.

Germany’s 10-year bund yield slipped five basis points to 0.85 percent as the securities rallied for the first time in four days. The yield reached a one-month high of 0.99 percent earlier after Greek Prime Minister Alexis Tsipras surrendered to European demands for reform.

Zig, Zag

Euro-zone bonds have been buffeted all day, with those from peripheral nations initially dropping amid disappointment no agreement had been reached over the weekend. The securities then jumped after a deal was announced, only to slide as investors digested the fact that Tsipras still needed the approval of Greece’s parliament at a session scheduled for Wednesday. By mid-afternoon European time, those declines had reversed and the bonds were ralllying again.

The extra yield, or spread, investors demand to hold Spain’s 10-year bonds instead of benchmark German securities rose two basis points to 125 basis points, after earlier dropping to a two-month low of 107.

100 Points

The equivalent Italy-Germany spread widened two basis points to 126. It had narrowed at the end of last week amid optimism a deal would get done.

“If we get a deal and everything goes according to plan, that spread will move toward the 100 basis-point level,” said Martin van Vliet, a senior interest-rate strategist at ING Groep NV in Amsterdam. “But it’s a bit premature to expect that to happen given the hurdles that are still out there.”

Greece’s government securities are this year’s worst performers among 29 sovereign debt markets tracked by Bloomberg World Bond Indexes, shunned by investors spooked by often antagonistic negotiations between the Syriza government and its creditors. The bonds lost 18 percent in the year through July 10, while Italy’s gained 0.1 percent and Spain’s declined 1.7 percent.

While the summit agreement Monday averts the worst-case scenario for Greece -- bankruptcy and a euro exit -- it’s only the precursor to negotiations on an aid package, which would also include 25 billion euros to recapitalize its weakened financial system.

“There are question marks from the Greek side,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “Once Wednesday moves nearer, of course, markets will be worried about how Greek politicians react. If it goes through, we will see further spread tightening.”

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