Italian and Spanish government bonds climbed as Greece and its creditors reached a deal on the reforms needed to secure more funding after six months of negotiations.
German securities dropped as news of the accord eased speculation that the Mediterranean country would be forced to leave the euro area, dimming interest in haven assets. The premium investors demand to hold Italian debt over Germany’s narrowed to the least in two months after Greece submitted proposals for a deal that met most of its creditors’ demands.
“This is definitely a driver for spread-tightening,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “There are always risks remaining but the market will concentrate on the main news that an agreement has been reached. We will see a strong outperformance of peripheral bonds. One of the main losers, especially in the short term, will be German bunds.”
Italy’s 10-year yield dropped three basis points, or 0.03 percentage point, to 2.10 percent at 8:56 a.m. London time. The 1.5 percent security due in June 2025 added 0.29, or 2.90 euros per 1,000-euro ($1,118) face amount, to 94.755.
Spain’s 10-year yield fell four basis points to 2.09 percent and Germany’s rose three basis points to 0.92 percent.
The extra yield, or spread, investors demand to hold Italy’s 10-year bonds instead of benchmark German securities narrowed to as low as 108 basis points, the least since May 5. It touched 84 basis points in March and jumped as high as 199 basis points on June 29. The Spain-Germany spread shrunk nine basis points to 114 basis points.
“We would expect a strong price action with peripheral spreads tightening notably toward 100 basis points” if an agreement is reached, Barclays Plc fixed-income strategists including Cagdas Aksu in London wrote in a note dated July 9.
Italian government securities returned 0.1 percent this year through July 10, outperforming the euro-area average of a 1.4 percent loss, according to Bloomberg World Bond Indexes. Greek bonds lost 18 percent.
For the past two weeks, 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 on June 30.
On July 14, a Greek yen-denominated bond matures. There are still 11.7 billion yen ($95 million) of notes outstanding.
The Greek state is also due to pay 3.5 billion euros in redemptions to the European Central Bank on July 20, as well as making various coupon payments before the end of the month.